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| DF > SEC Filings for DF > Form 10-Q on 1-May-2009 | All Recent SEC Filings |
1-May-2009
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 I - Item 1A - Risk Factors" in our 2008 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 Fresh Dairy Direct segment ("Fresh Dairy Direct"), previously referred to as 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 and fluid dairy products and Rachel's Organic® dairy products. Additionally, WhiteWave-Morningstar markets and sells private label cultured and extended shelf life dairy products.
Fresh Dairy Direct - Fresh Dairy Direct is our largest segment, with approximately 78% of our consolidated net sales in the three months ended March 31, 2009. Fresh Dairy Direct 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, Fresh Dairy Direct 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 Fresh Dairy Direct has one of the most extensive DSD systems in the United States. Fresh Dairy Direct 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 Fresh Dairy Direct's corporate sales department.
WhiteWave-Morningstar - WhiteWave-Morningstar's net sales were approximately 22% of our consolidated net sales in the three months ended March 31, 2009. 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'LAKES name 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 foods stores, mass merchandisers, convenience stores, drug stores and foodservice outlets. WhiteWave-Morningstar sells its products through its internal sales force and through independent brokers.
Recent Developments
Developments Since January 1, 2009
Conventional Milk Environment - Throughout most of 2008, we experienced historically high conventional milk prices due to high feed and energy 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. In the first quarter of 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 increase through the balance of 2009 but remain significantly below the peak levels experienced in 2007 and 2008.
Organic Milk Environment - The organic dairy industry remains a relatively new category and continues to experience significant swings in supply and demand. Beginning in the fourth quarter of 2008, we started to experience a slowing of growth in the organic milk category, and this trend has continued in the first quarter of 2009. 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 and, as a result, we may experience a continued softening in sales in this category. We continue to monitor our position in the organic milk category including taking proactive steps to manage our supply in the short-term, and we remain focused on maintaining our leading branded position as we balance market share considerations against profitability.
Noncontrolling Interest - Beginning January 1, 2009, in conjunction with entering into several new agreements between us and the Hero/WhiteWave 50/50 joint venture and based upon guidance in FASB Interpretation ("FIN") 46(R), "Consolidation of Variable Interest Entities" ("FIN46 (R)"), we have concluded that, despite the legal ownership structure, we are the primary beneficiary of the joint venture and the financial position and the results of operations for the joint venture should be consolidated for financial reporting purposes and presented in accordance with SFAS No. 160. Accordingly, the joint venture has been consolidated as of January 1, 2009. The resulting noncontrolling interest's share in the equity of the joint venture is presented in the Condensed Consolidated Balance Sheet and Condensed Consolidated Statement of Stockholders' Equity, and the net loss attributable to the noncontrolling interest is presented in the Condensed Consolidated Statement of Income.
Acquisitions - Subsequent to March 31, 2009, our Fresh Dairy Direct segment completed one acquisition with a purchase price of $35.0 million, excluding transaction costs which were expensed as incurred, and entered into an asset purchase agreement, subject to certain closing conditions including regulatory approval, for another acquisition with a purchase price of $90.0 million, excluding transaction costs. The completed acquisition was funded with borrowings under our revolving credit facility. We plan to be an active participant in the market consolidation opportunities currently available. The pipeline for opportunities is robust and we will continue to evaluate potential acquisitions on an ongoing basis. As a result, we expect transaction related expenses to be higher in 2009 than 2008.
Facility Closings and Reorganization Activities - During April 2009, we approved and announced our intent to effect the closure of two facilities within Fresh Dairy Direct during 2009. We recorded a $6.1 million impairment charge associated with these closures in the quarter ended March 31, 2009.
Equity Offering- On May 1, 2009, we announced our intent to sell equity securities in a registered public offering; however, there can be no assurance that this transaction will be consummated. We intend to use the net proceeds of the offering to repay the $122.8 million aggregate principal amount of our subsidiary's 6.625% senior notes due May 15, 2009, and use the remaining net proceeds to repay indebtedness under our receivables-backed facility. Using the net proceeds of this offering to repay indebtedness will more appropriately align our capital structure with our long-term goals, while increasing our financial and strategic flexibility given the current market environment.
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 March 31
2009 2008
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 2,702.9 100.0 % $ 3,077.0 100.0 %
Cost of sales 1,944.3 71.9 2,388.4 77.6
Gross profit(1) 758.6 28.1 688.6 22.4
Operating costs and expenses:
Selling and distribution 424.1 15.7 438.0 14.2
General and administrative 131.6 4.9 110.7 3.6
Amortization of intangibles 1.9 0.1 1.6 0.1
Facility closing and reorganization costs 8.2 0.3 2.2 0.1
Total operating costs and expenses 565.8 21.0 552.5 18.0
Total operating income $ 192.8 7.1 % $ 136.1 $ 4.4 %
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(1) As disclosed in Note 1 to our Consolidated Financial Statements in our 2008 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 March 31, 2009 Compared to Quarter Ended March 31, 2008 -
Consolidated Results
Net Sales - Net sales by segment are shown in the table below.
Quarter Ended March 31
$ Increase/ % Increase/
2009 2008 (Decrease) (Decrease)
(Dollars in millions)
Fresh Dairy Direct $ 2,098.5 $ 2,458.5 $ (360.0 ) (14.6 )%
WhiteWave-Morningstar 604.3 618 .5 (14.2 ) (2.3 )%
Corporate and Other(1) 0.1 - 0.1 -
Total $ 2,702.9 $ 3,077.0 $ (374.1 ) (12.2 )%
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(1) Includes Hero/WhiteWave Joint Venture.
The change in net sales was due to the following:
Quarter ended March 31, 2009
vs Quarter ended March 31, 2008
Pricing Total
and Product Increase/
Acquisitions Volume Mix Changes (Decrease)
(Dollars in millions)
Fresh Dairy Direct $ 16.1 $ (5.8 ) $ (370.3 ) $ (360.0 )
WhiteWave-Morningstar 0.7 (8.7 ) (6.2 ) (14.2 )
Corporate and Other(1) - 0.1 - 0.1
Total $ 16.8 $ (14.4 ) $ (376.5 ) $ (374.1 )
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(1) Includes Hero/WhiteWave Joint Venture.
Net sales decreased $374.1 million during the first quarter of 2009 as compared to the first quarter of 2008 primarily due to lower pricing, as significantly lower commodity costs were passed through to customers.
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 decreased by $444.1 million, or 18.6%, in the first quarter of 2009 from the first quarter of 2008 primarily due to an overall decline in raw material costs. Raw milk and other ingredient and packaging costs decreased by approximately $420.4 million and $69.6 million, respectively. These decreases were partially offset by increases in personnel related costs of $9.5 million.
Operating Costs and Expenses - Our operating expenses increased $13.3 million, or 2.4%, in the first quarter of 2009 as compared to the same period in the prior year. Significant changes to operating costs and expenses include the following:
• Selling and distribution costs decreased $13.9 million primarily due to lower fuel, third-party freight and fleet costs of $22.9 million, partially offset by higher repairs and maintenance costs for distribution assets of $2.6 million, increased personnel costs of $2.0 million, and higher bad debt expense of $1.9 million.
• General and administrative costs increased $20.9 million primarily due to higher professional fees and other outside services of $6.1 million; increased employee-related costs of $5.3 million, higher property and casualty insurance costs of $3.3 million, as well as higher transaction-related costs of $2.3 million.
• Higher facility closing and reorganization costs of $6.0 million related to asset impairment charges associated with two facilities identified for closure in April 2009 as well as previously announced closures.
Other (Income) Expense - Interest expense decreased to $68.3 million in the first quarter of 2009 from $83.8 million in the first quarter of 2008 primarily due to a lower average debt balance in the first quarter of 2009 compared to the prior year.
Income Taxes - Income tax expense was recorded at an effective rate of 39.4% in the first quarter of 2009 compared to 40.4% in the first quarter of 2008. Our effective tax rate varies based on the relative earnings of our business units.
Quarter Ended March 31, 2009 Compared to Quarter Ended March 31, 2008 - Results by Segment
We evaluate the performance of our segments based on sales and operating profit or loss before gains and losses on the sale of businesses, facility closing and reorganization costs and foreign exchange gains and losses. In addition, the results of the Hero/WhiteWave joint venture and expenses related to share-based compensation have not been allocated to the Fresh Dairy Direct and WhiteWave-Morningstar segments. Therefore, the measurement of segment operating income presented below is before such items.
Fresh Dairy Direct
The key performance indicators of our Fresh Dairy Direct segment are sales
volumes, gross profit and operating income.
Quarter Ended March 31
2009 2008
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 2,098.5 100.0 % $ 2,458.5 100.0 %
Cost of sales 1,517.0 72.3 1,933.8 78.7
Gross profit 581.5 27.7 524.7 21.3
Operating costs and expenses 399.8 19.0 393.8 16.0
Total segment operating income $ 181.7 8.7 % $ 130.9 5.3 %
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Net Sales - Fresh Dairy Direct fluid milk volumes increased approximately 1.4% while total sales volume was relatively flat during the first quarter of 2009 versus the first quarter of 2008. Despite relatively flat volumes, Fresh Dairy Direct's net sales decreased 14.6% primarily due to significantly lower commodity costs being passed through to customers.
Fresh Dairy Direct 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. 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 first quarter of 2009 compared to the first quarter of 2008:
Quarter Ended March 31*
2009 2008 % Change
Class I mover(1) $ 11.96 $ 19.12 (37.4 )%
Class I raw skim milk mover(1)(2) 8.04 14.84 (45.8 )
Class I butterfat mover(2)(3) 1.20 1.37 (12.4 )
Class II raw skim milk minimum(1)(4) 6.63 13.75 (51.8 )
Class II butterfat minimum(3)(4) 1.13 1.34 (15.7 )
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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 2008 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. Fresh Dairy Direct's cost of sales decreased by $416.8 million, or
21.6%, in the first quarter of 2009 driven by lower raw milk, as well as packaging and other ingredient costs of $378.9 million and $46.4 million, respectively. These decreases were partly offset by higher employee-related costs of $7.3 million.
Operating Costs and Expenses - Fresh Dairy Direct's operating costs and expenses increased by $6.0 million, or 1.5%, in the first quarter of 2009 compared to the first quarter of 2008. The increase was primarily due to increased general and administrative expenses of $14.0 million related to higher employee-related costs, including salary and wages and incentive compensation as well as higher professional and outside service fees; higher selling and marketing costs of $5.2 million, partially offset by lower fuel costs of $18.0 million.
Fresh Dairy Direct operating income increased approximately 38.8% above year ago levels to $181.7 million as the increase in gross profit, primarily due to the significant decrease in raw material costs, more than offset a modest increase in operating expenses.
WhiteWave-Morningstar
The key performance indicators of our WhiteWave-Morningstar segment are sales
volumes, net sales dollars, gross profit and operating income.
Quarter Ended March 31
2009 2008
Dollars Percent Dollars Percent
(Dollars in millions)
Net sales $ 604.3 100.0 % $ 618.5 100.0 %
Cost of sales 427.4 70.7 454.3 73.5
Gross profit 176.9 29.3 164.2 26.5
Operating costs and expenses 113.4 18.8 118.8 19.2
Total segment operating income $ 63.5 10.5 % $ 45.4 7.3 %
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Net Sales - Net sales of the WhiteWave-Morningstar segment decreased $14.2 million to $604.3 million in the first quarter of 2009. Net sales of the WhiteWave platform declined modestly related to volume declines in our International Delight, Horizon Organic, and Silk products, which was impacted by our decision to exit a certain foodservice business as well as an organic milk business in the U.K. These volume declines were substantially offset by increased volume in our LAND O'LAKES products and generally higher pricing across the branded product portfolio. In addition, net sales of the Morningstar platform declined by $10.1 million on the pass through of lower commodity prices, partially offset by single digit volume growth of private-label products, particularly yogurt and cottage cheese.
Cost of Sales - WhiteWave-Morningstar's cost of sales decreased by $26.9 million, or 5.9%, in the first quarter of 2009 from the first quarter of 2008. This decrease was primarily driven by lower conventional raw milk costs of $36.5 million at Morningstar, as well as productivity initiatives, partly offset by higher employee-related costs of $3.7 million and increased farm and livestock costs of $6.9 million.
Operating Costs and Expenses - WhiteWave-Morningstar's operating costs and expenses decreased by $5.4 million, or 4.5%, during the first quarter of 2009, from the first quarter of 2008 primarily due to lower freight costs of $5.5 million.
WhiteWave-Morningstar operating income increased 39.9% above year ago levels to $63.5 million, driven by higher price realization across the WhiteWave businesses and a favorable commodity environment at Morningstar.
Liquidity and Capital Resources
As of March 31, 2009, the recent volatility in the capital and credit market has not had any material adverse impact on our liquidity. Based on information available to us, each of the financial institutions syndicated under our senior secured credit facility and our receivables-backed facility are able to fulfill their commitments. However, there can be no assurance that each financial institution will be able to continue to fulfill its funding obligations.
Notwithstanding the above, we believe that our cash on hand, coupled with future cash flows from operations and other available sources of liquidity, including our existing $1.5 billion 5-year senior secured revolving credit facility and our $600 million receivables-backed facility, which we intend and expect to renew under similar 364 day terms at the end of the current term, will provide sufficient liquidity to allow our Company to meet our cash requirements. We may, from time to time, raise additional funds through borrowings or public or private sales of debt or equity securities, which may be issued from time to time under an effective registration statement, through the issuance of securities in a transaction exempt from registration under the Securities Act of 1933 or a combination of one or more of the foregoing.
At March 31, 2009, we had $4.37 billion of outstanding debt obligations and cash-on-hand of $63.0 million. Our anticipated uses of cash include capital expenditures, working capital needs, pension contributions and financial obligations. On an ongoing basis, we will evaluate and consider strategic acquisitions, divestitures, joint ventures, repurchasing shares of our common stock, as well as, other transactions to create shareholder value and enhance financial performance. Such transactions may require cash expenditures or generate proceeds.
On May 1, 2009, we announced our intent to sell equity securities in a registered public offering; however, there can be no assurance that this transaction will be consummated. We intend to use the net proceeds of the offering to repay the $122.8 million aggregate principal amount of our subsidiary's 6.625% senior notes due May 15, 2009, and use the remaining net proceeds to repay indebtedness under our receivables-backed facility. Using the net proceeds of this offering to repay indebtedness will more appropriately align our capital structure with our long-term goals, while increasing our financial and strategic flexibility given the current market environment.
Under the senior secured credit facility, we are required to comply with certain financial covenants, including, but not limited to, maximum leverage and minimum interest coverage ratios. We are currently in compliance with all financial covenants and based on our internal projections we expect to maintain such compliance. As of March 31, 2009, our Leverage Ratio was 4.45 times consolidated funded indebtedness to consolidated EBITDA for the prior four consecutive quarters, each as defined under and calculated in accordance with the terms of our senior secured credit facility and our receivables-backed facility. The maximum permitted Leverage Ratio as of March 31, 2009 is 5.75 times and will decline to 5.00 times as of December 31, 2009 and a final time to 4.50 times as of December 31, 2010.
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