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| DF > SEC Filings for DF > Form 10-K on 24-Feb-2009 | All Recent SEC Filings |
24-Feb-2009
Annual Report
Business Overview
We are one of the leading food and beverage companies in the United States. Our DSD Dairy segment ("DSD Dairy") 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 ("WhiteWave-Morningstar") 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, Rachel's Organic® dairy products and other fluid dairy products. Additionally, WhiteWave-Morningstar markets and sells private label cultured and extended shelf life dairy products.
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 WhiteWave-Morningstar. All segment results have been recast to present results on a comparable basis. These changes had no impact on consolidated net sales or operating income.
DSD Dairy - DSD Dairy is our largest segment, with approximately 78.7% of our consolidated net sales in 2008. DSD Dairy 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, DSD Dairy 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 DSD Dairy has one of the most extensive refrigerated DSD systems in the United States. DSD Dairy 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 DSD Dairy's corporate sales department.
The dairy industry is a mature industry that has traditionally been characterized by slow to flat growth, low profit margins, fragmentation and excess capacity. Excess capacity resulted from the development of more efficient manufacturing techniques and declining demand for fluid milk products. From 1990 through 2001, the dairy industry experienced significant consolidation led by us. Consolidation has resulted in lower operating costs, less excess capacity and greater efficiency. According to the United States Department of Agriculture ("USDA"), per capita consumption of fluid milk continues to decline while total consumption has remained relatively flat due to population increases. Therefore, volume sales growth across the industry generally remains flat to modest, profit margins generally remain low and excess manufacturing capacity continues to exist. In this environment, price competition is particularly intense, as smaller processors seek to retain enough volume to cover their fixed costs. In response to this dynamic and significant competitive pressure caused by the ongoing consolidation among food retailers, many processors, including us, are now placing an increased emphasis on product differentiation and cost reduction in an effort to increase consumption, sales and margins. Historically, DSD Dairy's volume growth has kept pace with or exceeded the industry, which we attribute largely to our national DSD system, brand recognition and service quality.
DSD Dairy has several competitors in each of our major product and geographic markets. Competition between dairy processors for shelf-space with retailers is based primarily on price, service, quality and the expected or historical sales performance of the product compared to its competitors. In some cases DSD Dairy pays fees to customers for shelf-space. Competition for consumer sales is based on a variety of factors such as brand recognition, price, taste preference and quality. Dairy products also compete with many other beverages and nutritional products for consumer sales.
WhiteWave-Morningstar - WhiteWave-Morningstar's net sales were approximately 21.3% of our consolidated net sales in 2008. WhiteWave-Morningstar 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, The Organic Cow® organic dairy products, International Delight coffee
creamers, LAND O'LAKES creamers and fluid dairy products and Rachel's Organic dairy products. We license the LAND O'LAKESname from a third party. With the addition of Morningstar, WhiteWave-Morningstar now includes private label cultured and extended shelf life dairy products such as ice cream mix, sour and whipped cream, yogurt and cottage cheese. WhiteWave-Morningstar sells its products to a variety of customers, including grocery stores, club stores, natural food stores, mass merchandisers, convenience stores, drug stores and foodservice outlets. WhiteWave-Morningstar sells its products through its internal sales force and through independent brokers.
WhiteWave-Morningstar has several competitors in each of its product markets. Competition to obtain shelf-space with retailers for a particular product is based primarily on the expected or historical sales performance of the product compared to its competitors. In some cases, WhiteWave-Morningstar pays fees to retailers to obtain shelf-space for a particular product. Competition for consumer sales is based on many factors, including brand recognition, price, taste preferences and quality. Consumer demand for soy and organic foods has grown rapidly in recent years due to growing consumer confidence in the health benefits of soy and organic foods, and we believe WhiteWave-Morningstar has a leading position in the soy and organic foods category.
Recent Developments
Conventional Milk Environment
Throughout 2007, we experienced rapidly increasing and historically high conventional milk prices. In 2008, we continued to experience historically high conventional milk prices. Contributors to the high prices included high feed and fuel costs, as well as global demand for dry powdered milk. This was compounded by significant and sustained increases in diesel fuel and resin costs. In the fourth quarter of 2008, the industry experienced a sharp decline for export demands and favorable movements in energy cost components resulting in declines in conventional milk, diesel and resin prices. Despite the volatility of the average Class I mover throughout 2008, the average for the 12 months ended December 31, 2008 approximated that of 2007. In January and February 2009, the Class I mover declined significantly from the average for the fourth quarter of 2008. We currently expect the average Class I mover to be at the low end of the historical range for 2009, with a generally increasing trend through most of the year.
Organic Milk Environment
The organic dairy industry remains a relatively new category and continues to experience significant swings in supply and demand. In 2007, the industry, including us, experienced a significant oversupply of organic raw milk driven by earlier changes in the organic farm transition regulations, as well as economic incentives for conventional farmers to begin the transition to organic farming. In 2008, the balance of supply and demand improved resulting in a reduction of the aggressive discounting. However, sharp increases in feed and fuel costs drove up the cost of organic raw milk at a greater pace than the corresponding increases in retail prices. The retail price increases on private label products lagged that of branded products, creating pricing pressures and causing retail price gaps to expand.
Beginning in the fourth quarter of 2008, we started to experience a noticeable slowing of growth in the organic milk category. As a result of the continuing economic downturn, we believe milk consumers have become and will continue to be increasingly price sensitive to organic milk. As a result, we believe we will experience a continued slowdown in 2009 of our organic milk growth rate. We continue to monitor our position in the organic milk category and remain focused on maintaining our leading branded position as we balance market share considerations against profitability.
We purchase organic raw milk from our network of over 400 organic family farms using multi-year purchase agreements. We anticipate that such agreements will be sufficient to meet our anticipated demand in 2009. As the category growth slows in 2009, it is possible that the industry will be faced with an oversupply position potentially resulting in additional discounting.
Public Offering of Equity Securities
On March 5, 2008, we issued and sold 18.7 million shares of our common stock in a public offering. 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 secured credit facility.
Acquisitions
During 2008, we completed several acquisitions for which the aggregate purchase price was approximately $95.9 million, including transaction costs. Significant acquisition opportunities continue to exist, which are attributable to continued fragmentation in the industry, tightening of financial markets and shifting consumer behavior.
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. In 2008, we spent $20.4 million related to this joint venture in the form of cash and capital expenditures, of which $7.7 million was contributed to the joint venture as of December 31, 2008. We expect our 2009 earnings will be negatively impacted as Hero/WhiteWave commences operations and incurs start-up and introductory marketing costs.
Pension Costs and Funding
Due to the turmoil in the financial markets in 2008, we experienced significant declines in the fair market value of the equity and debt instruments that we hold within our defined benefit master trust used to settle future defined benefit plan obligations. As a result, our funded status as of December 31, 2008 significantly declined from the prior year, and will require an increase in future funding, as well as increase our plan costs.
Facility Closing and Reorganization Activities
In 2008, we recorded a charge of $22.8 million as part of our ongoing supply chain and costs savings initiatives. We recorded a charge of $18.3 million in our DSD Dairy operations primarily related to the closure of ice cream operations in Hickory, North Carolina; the closure of facilities in Kalispell, Montana and Denver, Colorado; as well as other previously announced plans. We also recorded a charge of $4.5 million in our WhiteWave-Morningstar operations related to the closure of a facility in Belleville, Pennsylvania. These costs include the following types of cash and non-cash charges:
• Workforce reductions as a result of facility closings, facility reorganizations and consolidation of administrative functions;
• Shutdown costs, including those costs necessary to prepare abandoned facilities for closure;
• Costs incurred after shutdown, such as lease obligations or termination costs, utilities and property taxes;
• Costs associated with the centralization of certain finance and transaction processing activities from local to regional facilities; and
• Write-downs of property, plant and equipment and other assets, primarily for asset impairments as a result of facilities that are no longer used in operations. The impairments relate primarily to owned buildings, land and equipment at the facilities, which are written down to their estimated fair value. We are marketing these properties for sale.
We expect to incur additional charges related to these restructuring plans of $3.4 million, primarily in 2009. We anticipate that we will close additional facilities as we continue the evaluation of our supply chain; however, we cannot currently predict the timing or related charges with respect to such closures. Additionally, we will continue to evaluate additional opportunities for centralization of activities, which could result in additional charges in the future.
Results of Operations
The following table presents certain information concerning our financial results, including information presented as a percentage of net sales.
Year Ended December 31
2008 2007 2006
Dollars Percent Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 12,454.6 100.0 % $ 11,821.9 100.0 % $ 10,098.6 100.0 %
Cost of sales 9,509.3 76.4 9,084.3 76.8 7,358.7 72.9
Gross profit(1) 2,945.3 23.6 2,737.6 23.2 2,739.9 27.1
Operating costs and expenses:
Selling and distribution 1,817.7 14.6 1,721.7 14.6 1,648.9 16.3
General and administrative 486.3 3.9 419.5 3.5 409.2 4.1
Amortization of intangibles 9.8 0.1 6.7 0.1 6.0 0.1
Facility closing and
reorganization costs 22.8 0.1 34.4 0.3 25.1 0.2
Other operating expense - - 1.7 - - -
Total operating costs and
expenses 2,336.6 18.7 2,184.0 18.5 2,089.2 20.7
Operating income $ 608.7 4.9 % $ 553.6 4.7 % $ 650.7 6.4 %
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(1) As disclosed in Note 1 to our Consolidated Financial Statements, 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.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 - Consolidated Results
Net Sales - Net sales by segment are shown in the table below.
Net Sales
$ %
Increase/ Increase/
2008 2007 (Decrease) (Decrease)
(Dollars in millions)
DSD Dairy $ 9,804.6 $ 9,411.1 $ 393.5 4.2 %
WhiteWave-Morningstar 2,650.0 2,410.8 239.2 9.9
Total $ 12,454.6 $ 11,821.9 $ 632.7 5.4
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The change in net sales was due to the following:
Change in Net Sales 2008 vs. 2007
Pricing Total
and Product Increase/
Acquisitions Volume Mix Changes (Decrease)
(Dollars in millions)
DSD Dairy $ 155.3 $ (26.2 ) $ 264.4 $ 393.5
WhiteWave-Morningstar 19.6 148.6 71.0 239.2
Total $ 174.9 $ 122.4 $ 335.4 $ 632.7
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Net sales increased during 2008 compared to the prior year primarily due to the higher pass through of overall dairy and commodity costs and acquisitions completed in 2008 in DSD Dairy, as well as continued strong volume growth at WhiteWave-Morningstar in both our national brands and cultured and extended shelf life dairy products.
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. Cost of sales increased $425.0 million, or 4.7%, during 2008 from 2007 primarily due to higher raw material and packaging costs of $207.5 million, higher raw milk costs of $126.6 million and increased employee-related costs.
Operating Costs and Expenses - Our operating expenses increased $152.6 million, or 7.0%, during 2008 compared to the prior year. Significant changes to operating costs and expenses include the following:
• Selling and distribution costs increased $96.0 million primarily due to higher fuel, third-party freight and fleet costs of $56.2 million, increased personnel-related costs of $21.4 million and higher advertising expenses of $9.4 million;
• General and administrative costs increased $66.8 million primarily due to personnel-related costs of $32.1 million, which was significantly impacted by incentive-based compensation of $29.8 million; higher professional fees and other outside services of $11.0 million, primarily related to strategic corporate-driven initiatives, as well as increased costs related to contemplated strategic transactions of $4.4 million;
• The increases above were partly offset by net facility closing, reorganization and other costs that were $13.3 million lower than 2007. See Note 15 to our Consolidated Financial Statements for further information on our facility closing and reorganization activities.
Other (Income) Expense - Interest expense decreased to $308.1 million in 2008 from $333.2 million in 2007 primarily due to a lower average debt balance during 2008 driven by the reduction in debt related to our $400 million paydown of the revolving portion of our senior secured credit facility with proceeds from our equity offering on March 5, 2008, as well as the paydown of debt with cash flow from operations. In addition, we wrote off $13.5 million in financing costs in 2007 due to the completion of our senior secured credit facility and incurred $5.0 million of professional fees and other costs related to the payment of a special cash dividend.
Income Taxes - Income tax expense was recorded at an effective rate of 38.3% in 2008 compared to 39.2% in 2007. Our effective tax rate varies based on the relative earnings of our business units. In 2008, our effective tax rate was positively impacted by the settlement of taxing authority examinations and the effects of state tax law changes.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 - Results by Segment
DSD Dairy
The key performance indicators of DSD Dairy are sales volumes, gross profit and
operating income.
Year Ended December 31
2008 2007
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 9,804.6 100.0 % $ 9,411.1 100.0 %
Cost of sales 7,559.8 77.1 7,320.5 77.8
Gross profit 2,244.8 22.9 2,090.6 22.2
Operating costs and expenses 1,653.5 16.9 1,552.6 16.5
Total operating income $ 591.3 6.0 % $ 538.0 5.7 %
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Net Sales - The increase in DSD Dairy's net sales of 4.2% was due primarily to the higher pass through of overall dairy and other commodity costs to customers, as well as acquisitions completed in 2008.
DSD Dairy 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 DSD Dairy'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 2008 compared to 2007:
Year Ended December 31*
2008 2007 % Change
Class I mover(1) 18.00 $ 18.14 (0.8 )%
Class I raw skim milk mover(1)(2) 12.94 13.47 (3.9 )
Class I butterfat mover(2)(3) 1.57 1.47 6.8
Class II raw skim milk minimum(1)(4) 11.13 13.67 (18.6 )
Class II butterfat minimum(3)(4) 1.57 1.48 6.1
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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" 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.
Throughout 2007, we experienced rapidly increasing and historically high conventional milk prices. In 2008, we continued to experience historically high conventional milk prices. Contributors to the high prices included high feed and fuel costs, as well as global demand for dry powdered milk. This was compounded by significant and sustained increases in diesel fuel and resin costs. In the fourth quarter of 2008, the industry experienced a sharp decline for export demands and favorable movements in energy cost components resulting in declines in conventional milk, diesel and resin prices. Despite the volatility of the average Class I mover throughout 2007 and 2008, the average for the 12 months ended December 31, 2008 approximated that of 2007. We currently expect the average Class I mover to be at the low end of the historical range for 2009, with a generally increasing trend through most of the year.
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 in 2007, improved effectiveness in the pass through of costs to our customers, and our continued focus to drive productivity and efficiency within our operations.
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 increased by $239.3 million, or 3.3%, during 2008 driven by higher raw material and packaging costs, particularly resin and raw milk, of $182.5 million; increased employee-related costs of $28.4 million as well as higher utilities and equipment costs of $20.9 million.
Operating Costs and Expenses - DSD Dairy's operating costs and expenses increased by $100.9 million, or 6.5%, during 2008. The increase was primarily due to higher distribution costs of $51.6 million driven by higher fuel, third-party freight and fleet costs of $59.4 million slightly offset by lower outside services; higher personnel-related costs of $49.5 million, due primarily to increased salaries and wages and incentive-based compensation.
DSD Dairy's operating income was approximately 9.9% above year ago levels. In addition to the factors described above, DSD Dairy's results benefited from tight cost controls across the business including continued benefits from the reduction in 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 WhiteWave-Morningstar are sales volumes, net
sales dollars, gross profit and operating income.
Year Ended December 31
2008 2007
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 2,650.0 100.0 % $ 2,410.8 100.0 %
Cost of sales 1,952.7 73.7 1,762.4 73.1
Gross profit 697.3 26.3 648.4 26.9
Operating costs and expenses 491.9 18.6 443.4 18.4
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