1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
__X__ Quarterly report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended August 30, 1998
-----------------
or
_____ Transition report pursuant to Section 13 of 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________
Commission file number 1-08262
-----------
DEAN FOODS COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0984820
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3600 North River Road, Franklin Park, Illinois 60131
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 678-1680
---------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
The number of shares of the Registrant's Common Stock, par value $1 per share,
outstanding as of the date of this report was 39,342,030.
1
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
AUGUST 30,1998 AND AUGUST 24, 1997
(In Thousands, Except for Per Share Amounts)
Three Months Ended
------------------------------------
August 30, August 24,
1998 1997
----------- ---------------
(Unaudited)
Net sales $ 825,104 $ 619,856
Costs of products sold 633,928 469,755
Delivery, selling and administrative expenses 144,867 106,934
------------- -------------
Operating earnings 46,309 43,167
Interest expense (9,056) (3,626)
Interest income 309 385
------------- -------------
Income from continuing operations before income taxes 37,562 39,926
Provision for income taxes 14,649 15,618
------------- -------------
Income from continuing operations 22,913 24,308
Loss from discontinued operations, net of taxes (1,741) (2,761)
------------- -------------
Net income $ 21,172 $ 21,547
============= =============
Basic income (loss) per share:
Income from continuing operations $ .57 $ .60
Loss from discontinued operations (.04) (.07)
-------------- -------------
Net income $ .53 $ .53
============== =============
Diluted income (loss) per share:
Income from continuing operations $ .56 $ .59
Loss from discontinued operations (.04) (.07)
-------------- -------------
Net income $ .52 $ .52
============== =============
Weighted average common shares:
Basic 40,023 40,427
============== =============
Diluted 40,983 41,224
============== =============
See accompanying Notes to Condensed Consolidated Financial Statements.
2
3
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
AUGUST 30, 1998 AND MAY 31, 1998
(In Thousands)
August 30, May 31,
1998 1998
---------- ---------
(Unaudited)
ASSETS
- ------
CURRENT ASSETS: $ 22,513 $ 11,932
Cash and cash equivalents
Accounts and notes receivable, less allowance for
doubtful accounts of $4,438 and $4,212, respectively 251,040 225,970
Inventories 181,579 135,405
Other current assets 48,028 46,931
------------ ------------
Total Current Assets 503,160 420,238
------------ ------------
PROPERTIES:
Property, plant and equipment, at cost 1,038,724 966,226
Accumulated depreciation 432,359 415,162
------------ ------------
Total Properties, net 606,365 551,064
------------ ------------
NET ASSETS OF DISCONTINUED OPERATIONS 291,997 288,037
------------ ------------
OTHER ASSETS:
Intangibles, net of amortization of
$14,001 and $11,537, respectively 351,662 334,597
Other Assets 6,726 13,253
------------ ------------
Total Other Assets 358,388 347,850
------------ ------------
TOTAL ASSETS $ 1,759,910 $ 1,607,189
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES: $ - $ 12,000
Notes payable to banks
Current installments of long-term obligations 8,340 9,014
Accounts payable and accrued expenses 321,600 311,303
Dividends payable 8,514 8,079
Federal and state income taxes payable 26,875 12,518
------------ ------------
Total Current Liabilities 365,329 352,914
LONG-TERM OBLIGATIONS 687,639 558,233
DEFERRED LIABILITIES 70,246 76,776
SHAREHOLDERS' EQUITY 636,696 619,266
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,759,910 $ 1,607,189
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
3
4
DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
AUGUST 30, 1998 AND AUGUST 24, 1997
(In Thousands)
Three Months Ended
-----------------------------------
August 30, August 24,
1998 1997
---------- ----------
(Unaudited)
Net cash provided from continuing operations $ 13,210 $ 33,410
---------- ----------
Cash flows from investing activities:
Capital expenditures (30,368) (26,397)
Proceeds from disposition of property,
plant and equipment 282 294
Acquisitions, net of cash acquired (85,768) (41,923)
---------- ----------
Net cash used in investing activities (115,854) (68,026)
---------- ----------
Cash flows from financing activities
Issuance of long-term obligations 140,000 -
Repayment of long-term obligations (11,324) (111)
Issuance (repayment) of notes payable to banks, net (12,000) 49,000
Unexpended industrial revenue bond proceeds 5,965 2,976
Cash dividends paid (7,983) (7,650)
Issuance of common stock 4,268 9,046
---------- ----------
Net cash provided by financing activities 118,926 53,261
---------- ----------
Net cash provided from (used by) discontinued operations (5,701) 1,097
---------- ----------
Increase in cash and temporary cash investments 10,581 19,742
Cash and temporary cash investments -
beginning of period 11,932 4,386
---------- ----------
Cash and temporary cash investments - end of period $ 22,513 $ 24,128
========== ==========
See accompanying Notes to Condensed Consolidated Financial Statements.
4
5
DEAN FOODS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Dollar amounts in thousand unless otherwise noted.
1. BASIS OF PRESENTATION
In the opinion of the Company, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the following
unaudited condensed consolidated financial statements have been included herein.
Certain information and footnote disclosures normally included in the financial
statements have been omitted. These unaudited condensed consolidated financial
statements should be read in conjunction with the Company's 1998 Annual Report
on Form 10-K. The results of operations for the three-month period ended August
30, 1998 are not necessarily indicative of the operating results for the full
year.
2. DISCONTINUED OPERATIONS
Net sales of discontinued operations were $110.8 million and $109.6 million for
the first quarters ended August 30, 1998 and August 24, 1997, respectively. The
income tax benefit included in discontinued operations was $1.2 million and $1.8
million for the August 30, 1998 and August 24, 1997 periods, respectively. Loss
from discontinued operations includes interest expense allocations (based on the
short-term interest expense incurred and changes in working capital levels) of
$2.0 million and $2.1 million for the quarters ended August 30, 1998 and August
24, 1997, respectively.
3. SHAREHOLDERS' EQUITY
On September 29, 1998, the Company's shareholders approved an increase in the
Company's authorized $1 par value Common Stock from 80 million shares to 150
million shares. The Board of Directors of the Company, at its regularly
scheduled Board Meeting on September 29, 1998, authorized a two million share
increase in its common shares authorized for repurchase. The purpose of any
such repurchases is to offset dilution from the Company's stock option programs
and to provide shares to utilize in acquisitions made for Company common stock.
Subsequent to the close of the first quarter, the Company repurchased
approximately 750,000 shares of its stock, under the previously existing Board
authorization.
4. INVENTORIES
The following is a tabulation of inventories by class at August 30, 1998, August
24, 1997, and May 31, 1998.
August 30, August 24, May 31,
1998 1997 1998
---------- ---------- ---------
(Unaudited)
Raw materials and supplies $ 40,444 $ 25,230 $ 45,266
Materials in process 34,122 28,594 12,432
Finished goods 116,696 101,349 87,390
----------- ----------- ----------
191,262 155,173 145,088
Less: Excess of current cost over stated
value of last-in, first-out inventories 9,683 10,442 9,683
----------- ----------- ----------
Total inventories $ 181,579 $ 144,731 $ 135,405
=========== =========== ==========
5
6
5. BUSINESS SEGMENT INFORMATION
The following is a tabulation of the Company's business segment information for
the three months ended August 30, 1998 and August 24, 1997.
(Unaudited)
Dairy Pickles Specialty Corporate Consolidated
---------- --------- ----------- ----------- --------------
August 30, 1998
Net sales $ 651,665 $ 93,405 $ 80,034 $ - $ 825,104
Operating earnings $ 32,503 $ 11,104 $ 11,169 $ (8,467) $ 46,309
August 24, 1997
Net sales $ 455,962 $ 90,460 $ 73,434 $ - $ 619,856
Operating earnings $ 32,413 $ 9,322 $ 10,993 $ (9,561) $ 43,167
6. LEGAL PROCEEDINGS
See PART II, Item 1 for a discussion of pending legal proceedings.
6
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST QUARTER FISCAL 1999 VERSUS FIRST QUARTER FISCAL 1998
RESULTS OF CONTINUING OPERATIONS
Net sales for the first quarter of fiscal 1999 of $825.1 million were $205.2
million, or 33.1%, higher than sales of $619.9 million in the prior year. While
net sales increased in all business segments, the majority of the sales increase
was due to the acquisitions completed in the Dairy segment. Operating earnings
increased 7.3% or $3.1 million over the prior year, reflecting strong
improvement in the Pickles segment and reductions in Corporate expenses.
BUSINESS SEGMENTS
DAIRY - Dairy segment sales of $651.7 million were 42.9%, or $195.7
million, higher than sales of $456.0 million in the prior year. Net sales
increases were primarily the result of acquisitions and a 5% volume increase in
the core Dairy business. Operating earnings were roughly even with the prior
year. Rising butterfat prices had only a slightly positive impact on the Dairy
segment, as benefits to the fluid business were offset by negative impacts in
the ice cream and extended shelf life operations. The first quarter is the
prime selling season for the Company's ice cream and, therefore, the high
butterfat costs impacted this segment to a greater extent than it would in other
times of the year. Integration costs related to recent acquisitions and
manufacturing start-up costs and introductory marketing expenses associated with
the Milk Chugs product also had a negative impact on Dairy segment earnings.
Current forecasts indicate that butterfat and raw milk costs will continue to
rise to record levels through at least October 1998, before declining.
PICKLES - Net sales in the Pickles segment for the first quarter of $93.4
million increased $2.9 million, or 3.3%, from $90.5 million in the prior year.
The increase in net sales is due to the acquisition of the Schwartz Pickle
Company, which offset a slight volume decrease in the core business, which is
expected to be timing in nature. Operating earnings increased $1.8 million, or
19.1%, as cost savings and the earnings from the Schwartz acquisition more than
offset the volume decline in the core business.
SPECIALTY - The Specialty segment experienced increased sales of $6.6
million, or 9.0%, to $80.0 million. Operating earnings increased 1.6% from the
prior year. The Dean Dip and Dressing division experienced increased sales but
lower operating earnings as a result of increased marketing and advertising
expenses. Sales and earnings increased in the Specialty segment's Food Products
division as efficiencies at a new dryer improved during the quarter and
contributed to the increased earnings.
CORPORATE
Corporate expenses decreased $1.1 million in the first quarter of fiscal 1999
versus the same period in the prior year. The decrease is primarily due to
lower compensation expense related to certain stock based incentive plans.
INTEREST EXPENSE
Interest expense increased $5.4 million during the first quarter compared to the
prior year, primarily the result of additional interest expense associated with
increased borrowings under the revolving
7
8
credit agreement used to fund acquisitions and the issuance of $150 million of
Senior Notes during the second quarter of fiscal 1998.
INCOME TAXES
The effective income tax rate for the first quarter of fiscal 1999 was 39.0%
compared to a rate of 39.1% for the first quarter a year ago.
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of taxes, was $1.7 million for the first
quarter of fiscal 1999, compared to a loss of $2.8 million in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
As of August 30, 1998 there have been no material changes in the Company's
liquidity or its capital resources from those described in the Management's
Discussion and Analysis contained in the Company's Annual Report on Form 10-K
for the fiscal year ended May 31, 1998. Cash and temporary cash investments
were $22.5 million at August 30, 1998.
Working capital at August 30, 1998 was $137.8 million compared to $67.3
million at May 31, 1998, and inventories at August 30, 1998 were $181.6 million,
an increase of $46.2 million over the balance at May 31, 1998. The increase in
working capital and inventories were primarily the result of two Dairy
acquisitions completed during the first quarter of fiscal 1999 and the Pickles
segment's typical seasonal inventory increase from the cucumber harvest. The
August 30, 1998 inventories were $36.8 million higher than inventories a year
ago due to the additional inventory associated with acquisitions completed
during fiscal 1999 and the latter half of fiscal 1998.
Seasonal working capital requirements are funded using the Company's
Revolving Credit Agreement and bilateral lines of credit. There were no
short-term borrowings outstanding at August 30, 1998, compared to $12.0 million
outstanding at May 31 ,1998.
CASH FLOWS - The change in cash for the first quarter of fiscal 1999 was an
increase of $10.6 million. Net cash provided from continuing operations was
$13.2 million for the first quarter of fiscal 1999 compared to $33.4 million in
the prior year. Net cash used in investing activities was $115.9 million for
first quarter fiscal 1999 versus $68.0 million in fiscal 1998. First quarter
fiscal 1999 investing activities include $85.8 million of cash paid for
acquisitions compared to $41.9 million paid during the first quarter of fiscal
1998. Net cash provided by financing activities was $118.9 million and $53.3
million for the first quarters of fiscal 1999 and fiscal 1998, respectively.
Fiscal 1999 financing activities include additional long-term borrowings under
the Company's Revolving Credit Agreement of $140.0 million. The current quarter
also reflects the repayment of $12.0 million of short-term notes payable versus
a $49.0 million issuance of short-term notes payable during the prior year
period.
SUBSEQUENT EVENTS
On September 23, 1998, the Company sold the stock of Dean Foods Vegetable
Company to Agrilink Foods, Inc. ("Agrilink") for $365.6 million in cash, a $30.0
million Agrilink subordinated note and Agrilink's aseptic foods business. Cash
proceeds were utilized to repay debt outstanding under the Company's revolving
credit agreement. Due to the uncertainty of realizability of the $30.0 million
subordinated note, the note has been valued at zero. The Company estimates the
after-tax gain on the sale of Vegetables segment to be approximately $80.0
million. The estimated gain is subject to final valuations and appraisals of
assets and completion of post-closing audits.
8
9
Subsequent to quarter-end, the Company completed the acquisition of U.C.
Milk Company for cash consideration and announced a merger agreement with
Berkley Farms, Inc.
YEAR 2000 COMPLIANCE
As discussed in the Company's Annual Report on Form 10-K, the Company is
currently assessing and modifying its computer, production and facility systems
and business processes to provide for their continued functionality. The
Company is also continuing to assess the readiness of external parties and
coordinating efforts to address the Year 2000 issue with those entities. The
Company is augmenting previously scheduled computer maintenance with procedures
designed to locate and correct Year 2000 problems and accelerating normal
equipment and software replacement schedules. The Company continues to expect
that substantially all new systems upgrades or reprogramming efforts will be
completed by December 31, 1998. The costs associated with these procedures have
not been and are not expected to be material to the Company's financial
condition or results of operations.
The Company believes that modification of existing software and conversions
to new software will result in Year 2000 compliance. However, given the
complexity of the Year 2000 issue, the impact on business operations due to
failure by the Company to achieve compliance or failure by external entities,
such as suppliers and vendors, to achieve compliance, which the Company cannot
control, could adversely affect the Company's consolidated results of
operations.
FORWARD LOOKING STATEMENTS
Certain statements in this Quarterly Report are "forward looking statements" as
defined by the Private Securities Litigation Reform Law of 1995. These
statements, which may be indicated by words such as "expects", "intends",
"believes", "forecasts", or other words of similar meaning, involve certain
risks and uncertainties that may cause actual results to differ materially from
expectations as of the date of this Report. These risks include, but are not
limited to, risks associated with the Company's acquisition strategy, adverse
weather conditions resulting in poor harvest conditions, raw milk costs and
butterfat prices, interest rate fluctuations, competitive pricing pressures,
marketing and cost-management programs, changes in government programs and
shifts in market demand. Additional information concerning these and other
risks is contained in the Company's Annual Report on Form 10-K for the fiscal
year ended May 31, 1998.
9
10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
------------------
There has been no material change in the legal proceedings reported
under Item 3 - Legal Proceedings, of the Company's Annual Report on
Form 10-K for the fiscal year ended May 31, 1998.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------
(a) Exhibits
3(a) Dean Foods Company Restated Certificate of
Incorporation dated February 8, 1988, as amended
September 29, 1998
10(a) Amendatory Agreement by and between the Company
and Agrilink Foods, Inc. dated July 24, 1998, and
Second Amendatory Agreement by and between the
Company and Agrilink Foods, Inc. dated
September 23, 1998
11 Basic and Diluted Income per Share
12 Computation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedules
.1 Three Months Ended August 30, 1998
.2 Three Months Ended August 24, 1997 (Restated)
(b) Reports on Form 8-K
(1) The Company filed a Current Report on Form 8-K, dated
July 27, 1998, with regards to the Company's Press
release dated July 27, 1998, "Dean Agrees to Sell
Vegetable Operations; Will Focus Resources on Dairy
Business"
(2) The Company filed a Current Report on Form 8-K, dated
September 23, 1998, with regards to the sale of the
stock of Dean Foods Vegetable Company.
10
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEAN FOODS COMPANY
-----------------------
(Registrant)
DATE: October 14, 1998 William R. McManaman
----------------- ------------------------------
WILLIAM R. McMANAMAN
Vice President, Finance and
Chief Financial Officer
DATE: October 14, 1998 William M. Luegers, Jr.
---------------- ----------------------------
WILLIAM M. LUEGERS, JR.
Controller
11