1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange - --- Act of 1934 For the quarterly period ended November 28, 1999 ---------------------- or Transition report pursuant to Section 13 or 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 36,974,954. 1 2 PART I - FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS DEAN FOODS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE SIX MONTHS ENDED NOVEMBER 28, 1999 AND NOVEMBER 29, 1998 (In Thousands, Except for Per Share Amounts) Second Quarter Ended Six Months Ended -------------------- ---------------- November 28, November 29, November 28, November 29, 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (Unaudited) Net sales $ 1,067,010 $ 934,377 $ 2,068,370 $ 1,759,481 Costs of products sold 827,941 732,363 1,589,945 1,366,291 Delivery, selling and administrative expenses 182,641 155,971 365,170 300,838 ----------- ----------- ----------- ----------- Operating earnings 56,428 46,043 113,255 92,352 Interest expense 12,348 7,993 23,733 17,049 Interest income 199 236 388 545 ----------- ----------- ----------- ----------- Income from continuing operations before income taxes 44,279 38,286 89,910 75,848 Provision for income taxes 17,269 14,932 35,065 29,581 ----------- ----------- ----------- ----------- Income from continuing operations 27,010 23,354 54,845 46,267 ----------- ----------- ----------- ----------- Discontinued operations, net of taxes: Loss from discontinued operations - (1,188) - (2,929) Gain on sale of discontinued operations - 83,820 - 83,820 ----------- ----------- ----------- ----------- Total discontinued operations - 82,632 - 80,891 ----------- ----------- ----------- ----------- Net income $ 27,010 $ 105,986 $ 54,845 $ 127,158 =========== =========== =========== =========== Basic income (loss) per share: Income from continuing operations $ .69 $ .59 $ 1.40 $ 1.16 Loss from discontinued operations - (.03) - (.07) Gain on sale of discontinued operations - 2.11 - 2.10 ----------- ----------- ----------- ----------- Net income $ .69 $ 2.67 $ 1.40 $ 3.19 =========== =========== =========== =========== Diluted income (loss) per share: Income from continuing operations $ .68 $ .58 $ 1.38 $ 1.14 Loss from discontinued operations - (.03) - (.07) Gain on sale of discontinued operations - 2.07 - 2.05 ----------- ----------- ----------- ----------- Net income $ .68 $ 2.62 $ 1.38 $ 3.12 =========== =========== =========== =========== Weighted average common shares: Basic 39,128 39,722 39,209 39,874 =========== =========== =========== =========== Diluted 39,756 40,483 39,832 40,723 =========== =========== =========== =========== See accompanying Notes to Condensed Consolidated Financial Statements. 2 3 DEAN FOODS COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS NOVEMBER 28, 1999 AND MAY 30, 1999 (In Thousands) November 28, May 30, 1999 1999 ----------- ---------- (Unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash equivalents $ 24,981 $ 15,958 Accounts and notes receivable, less allowance for doubtful accounts of $7,958 and $7,570, respectively 334,514 303,337 Inventories 217,593 168,836 Other current assets 86,375 94,007 ---------- ---------- Total Current Assets 663,463 582,138 ---------- ---------- PROPERTIES: Property, plant and equipment, at cost 1,329,136 1,242,238 Accumulated depreciation 549,825 477,292 ---------- ---------- Total Properties, net 779,311 764,946 ---------- ---------- OTHER ASSETS: Intangibles, net of amortization of $33,370 and $24,551, respectively 576,376 551,486 Other assets 21,944 13,306 ---------- ---------- Total Other Assets 598,320 564,792 ---------- ---------- TOTAL ASSETS $2,041,094 $1,911,876 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Current installments of long-term obligations $ 4,237 $ 2,651 Accounts payable and accrued expenses 422,211 398,174 Dividends payable 8,695 8,353 Federal and state income taxes payable 39,302 30,308 ---------- ---------- Total Current Liabilities 474,445 439,486 LONG-TERM OBLIGATIONS 708,403 631,286 DEFERRED LIABILITIES 125,244 124,690 SHAREHOLDERS' EQUITY 733,002 716,414 ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,041,094 $1,911,876 ========== ========== See accompanying Notes to Condensed Consolidated Financial Statements. 3 4 DEAN FOODS COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED NOVEMBER 28, 1999 AND NOVEMBER 29, 1998 (In Thousands) Six Months Ended -------------------------- November 28, November 29, 1999 1998 ----------- ----------- (Unaudited) Net cash provided from continuing operations $ 77,924 $ 9,515 --------- --------- Investing activities: Capital expenditures (68,909) (57,296) Proceeds from disposition of property, plant and equipment 1,233 517 Acquisitions, net of cash acquired (37,270) (120,677) Other (4,417) - --------- --------- Net cash used in investing activities (109,363) (177,456) --------- --------- Financing activities: Repayment of long-term obligations (1,338) (53,754) Issuance of commercial paper, net 79,692 - Repayment of revolving credit agreement, net - (70,000) Repayment of notes payable to banks, net - (2,500) Unexpended industrial revenue bond proceeds - 5,965 Cash dividends paid (16,918) (16,401) Issuance of common stock 2,847 5,574 Repurchase of treasury stock (23,821) (32,949) --------- --------- Net cash provided by (used in) financing activities 40,462 (164,065) --------- --------- Net cash provided by discontinued operations - 352,326 --------- --------- Increase in cash and temporary cash investments 9,023 20,320 Cash and temporary cash investments - beginning of period 15,958 11,932 --------- --------- Cash and temporary cash investments - end of period $ 24,981 $ 32,252 ========= ========= See accompanying Notes to Condensed Consolidated Financial Statements. 4 5 DEAN FOODS COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Dollar amounts in thousands 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 1999 Annual Report on Form 10-K. The results of operations for the six-month period ended November 28, 1999 are not necessarily indicative of the operating results for the full year. 2. Acquisitions During the first six months of fiscal 2000, the Company acquired the assets of Steinfeld's Pickle Products, a pickle producer located in Portland, Oregon, on July 1, 1999 and Dairy Express, Inc., a dairy distributor based in the Philadelphia area, on July 16, 1999. These acquisitions were accounted for as purchases and have been recorded using preliminary valuations of the assets and liabilities acquired. Goodwill arising from these acquisitions will be amortized over periods up to 40 years. Operating results of each acquisition have been included in the Company's results of operations since the date of acquisition. On August 23, 1999, the Company announced an equity investment in White Wave, Inc., a processor of soy based products; the results of which are included in the Specialty segment. The acquisitions and equity investment were made for cash, totaling $37.3 million. 3. Discontinued Operations On September 23, 1998, the Company sold the stock of Dean Foods Vegetable Company to Agrilink Foods, Inc. Accordingly, fiscal 1999 Vegetables segment results are presented as discontinued operations. For the six months ended November 29, 1998, net sales of discontinued operations were $139.8 million. Loss from discontinued operations for the six months ended November 29, 1998 includes allocated interest expense (based on the short-term interest expense incurred and changes in working capital levels) of $2.5 million and is net of an income tax benefit of $1.9 million. 4. Inventories The following is a tabulation of inventories by class at November 28, 1999, November 29, 1998, and May 30, 1999. November 28, November 29, May 30, 1999 1998 1999 ---- ---- ---- (Unaudited) Raw materials and supplies $ 48,369 $ 52,199 $ 52,482 Materials in process 24,745 22,740 11,292 Finished goods 154,297 135,322 114,776 --------- --------- --------- 227,411 210,261 178,550 Less: Excess of current cost over stated value of last-in, first-out inventories 9,818 9,683 9,714 --------- --------- --------- Total inventories $ 217,593 $ 200,578 $ 168,836 ========= ========= ========= 5 6 5. Depreciation and Amortization Expense Depreciation and amortization expense for the second quarters ended November 28, 1999 and November 29, 1998 was $27.8 million and $21.7 million, respectively. Depreciation and amortization for the six months ended November 28, 1999 and November 29, 1998 was $55.6 million and $43.2 million, respectively. 6. Business Segment Information The following is a tabulation of the Company's business segment information for the quarters and six months ended November 28, 1999 and November 29, 1998. (Unaudited) Dairy Pickles Specialty Corporate Consolidated ----- ------- --------- --------- ------------ Second Quarter Ended November 28, 1999 Net sales $ 857,721 $ 91,570 $ 117,719 $ - $ 1,067,010 Operating earnings $ 35,077 $ 10,084 $ 21,183 $ (9,916) $ 56,428 November 29, 1998 Net sales $ 741,942 $ 85,889 $ 106,546 $ - $ 934,377 Operating earnings $ 30,063 $ 8,882 $ 15,443 $ (8,345) $ 46,043 Six Months Ended November 28, 1999 Net sales $ 1,663,934 $ 186,782 $ 217,654 $ - $ 2,068,370 Operating earnings $ 77,968 $ 20,328 $ 36,659 $ (21,700) $ 113,255 Identifiable assets $ 1,390,659 $ 236,055 $ 299,920 $ 114,460 $ 2,041,094 November 29, 1998 Net sales $ 1,393,607 $ 179,294 $ 186,580 $ - $ 1,759,481 Operating earnings $ 62,566 $ 19,986 $ 26,612 $ (16,812) $ 92,352 Identifiable assets $ 1,214,807 $ 208,233 $ 259,053 $ 78,781 $ 1,760,874 7. Share Repurchase The Company may repurchase shares of its common stock from time to time in the open market, in privately-negotiated transactions or otherwise at a price or prices reasonably related to the then prevailing market price. During the first six months of fiscal 2000 the Company repurchased a total of 608,100 shares, which are carried at cost. Subsequent to the end of the second quarter of fiscal 2000, the Company has repurchased an additional 1,804,800 shares. As of January 12, 2000, the Company has 276,756 shares remaining available for repurchase under current Board of Directors authorization. 8. 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 SECOND QUARTER FISCAL 2000 VERSUS SECOND QUARTER FISCAL 1999 RESULTS OF CONTINUING OPERATIONS Net sales for the second quarter of fiscal 2000 increased $132.6 million, or 14.2%, to $1.1 billion over the second quarter of fiscal 1999. The net sales increase is primarily the result of acquisitions completed during fiscal 2000 and the latter half of fiscal 1999. Second quarter fiscal 2000 operating earnings increased 22.6% to $56.4 million from $46.0 million in fiscal 1999. Each business segment reported higher fiscal 2000 earnings in comparison to the prior year. Second quarter income from continuing operations was $27.0 million, or $.68 per diluted share, compared to $23.4 million, or $.58 per diluted share, in the prior year. BUSINESS SEGMENTS DAIRY - Dairy segment net sales for the second quarter of fiscal 2000 of $857.7 million were $115.8 million, or 15.6%, higher than sales of $741.9 million in the prior year. Net sales increased in the Dairy segment primarily due to acquisitions completed over the past year, but also reflects the pass-through of higher raw milk costs. Dairy segment operating earnings increased 16.7% to $35.1 million from $30.1 million in the prior year. The increase was the result of improved earnings in the Company's ice cream and extended shelf life (ESL) operations, each of which benefited from improved plant efficiencies and a better commodity environment, while ESL also benefited from strong volume growth. Offsetting a portion of these improvements was a decline in operating earnings for the fluid operations, which was negatively impacted by commodity pricing. PICKLES - Net sales in the Pickles segment increased 6.6% to $91.6 million in fiscal 2000 from $85.9 million in fiscal 1999. The increase is primarily attributable to the first quarter fiscal 2000 acquisition of the Steinfeld's Pickle Company located in Portland, Oregon. Operating earnings of $10.1 million increased from earnings of $8.9 million a year ago. The majority of the earnings increase is due to the Steinfeld's acquisition. Efficiencies generated by the Company's cost reduction programs also favorably impacted second quarter fiscal 2000 earnings. SPECIALTY - Specialty segment net sales of $117.7 million for the second quarter were 10.5% higher than sales for the same period a year ago. The sales increase is primarily due to the aseptic foods business acquired in conjunction with the Vegetables segment disposition and the acquisition of Custom Foods Processors, a powder producer, completed during the latter half of fiscal 1999. Operating earnings for the second quarter increased 37.2% to $21.2 million. In addition to the two acquisitions, the Dean Dip and Dressing division also contributed to the increased earnings through improvement in operating efficiencies and reduced advertising expenses. CORPORATE Corporate expenses increased $1.6 million in the second quarter of fiscal 2000 versus the same period of the prior year primarily due to higher incentive compensation plan expenses and costs associated with the Company's enterprise-wide information systems initiative. INTEREST EXPENSE Second quarter interest expense of $12.3 million was $4.4 million higher than the same period of the prior year. The increase over the prior year was primarily due to the increased debt related to acquisitions completed during fiscal 2000 and the latter half of fiscal 1999. 7 8 INCOME TAXES The effective tax rate for the second quarter of fiscal 2000 and fiscal 1999 was 39.0%. SIX MONTHS ENDED FISCAL 2000 VERSUS SIX MONTHS ENDED FISCAL 1999 RESULTS OF CONTINUING OPERATIONS Net sales for the six months ended fiscal 2000 were $2.1 billion versus net sales of $1.8 billion in the prior year. Net sales increased in all business segments, with the majority of the increase due to acquisitions. Operating earnings increased to $113.3 million in fiscal 2000 from $92.4 million in fiscal 1999. Income from continuing operations for the six months ended fiscal 2000 was $54.8 million, or $1.38 per diluted share, versus $46.3 million, or $1.14 per diluted share, in fiscal 1999. BUSINESS SEGMENTS DAIRY - Net sales in the Dairy segment of $1.7 billion were $270.3 million, or 19.4%, higher than sales of $1.4 billion in the prior year. The majority of the sales increase was related to acquisitions completed during the latter half of fiscal 1999, as well as a volume increase in the ESL business. Operating earnings increased 24.6% to $78.0 million from $62.6 million in the prior year. The increase is primarily attributable to increased earnings in the ice cream and ESL operations, both of which benefited from improved margins and plant efficiencies during the first six months of fiscal 2000. The ESL volume improvement also favorably impacted fiscal 2000 operating earnings. Overall, fluid operations were up slightly over the prior year despite higher commodity costs as improved plant efficiencies from last year's plant consolidations began to be realized. PICKLES - Pickles segment net sales of $186.8 million were $7.5 million, or 4.2%, higher than fiscal 1999 primarily due to the Steinfeld's acquisition completed in early fiscal 2000. Fiscal 2000 operating earnings of $20.3 million increased over earnings of $20.0 million in the prior year. The earnings increase is primarily attributable to the Steinfeld's acquisition, which was partially offset by plant inefficiencies experienced during the first quarter due to weather-related crop shortages. SPECIALTY - Fiscal 2000 net sales increased 16.7% to $217.7 million in the Specialty segment. Operating earnings of $36.7 million increased in fiscal 2000 by 37.8%, or $10.0 million, compared to the prior year. The sales and earnings increases are primarily due to two fiscal 1999 acquisitions. Additionally, the Dean Dip and Dressing division continued to experience higher earnings in comparison to the prior year, reflecting improved operating efficiencies and lower advertising expense. CORPORATE Corporate expenses increased $4.9 million, or 29.1%, for the six months of fiscal 2000 compared to the same period of the prior year, primarily due to higher incentive compensation expense and costs associated with the Company's enterprise-wide information systems initiative. INTEREST EXPENSE Interest expense for the six months of fiscal 2000 increased $6.7 million, or 39.2%, over the same period in the prior fiscal year. The increase is the result of higher average borrowings outstanding during fiscal 2000. INCOME TAXES The effective income tax rate for the first six months of fiscal 2000 and fiscal 1999 was 39.0%. DISCONTINUED OPERATIONS Loss from discontinued operations, net of taxes, was $2.9 million for the six months ended fiscal 1999. On September 23, 1998, the Company sold the stock of Dean Foods Vegetable Company to Agrilink 8 9 Foods, Inc. The sale of the discontinued operations resulted in an after-tax gain of $83.8 million, or $2.05 per diluted share. LIQUIDITY AND CAPITAL RESOURCES As of November 28, 1999 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 30, 1999. Cash and temporary cash investments were $25.0 million at November 28, 1999. Working capital at November 28, 1999 was $189.0 million compared to $142.7 million at May 30, 1999, and inventories at November 28, 1999 were $217.6 million, an increase of $48.8 million over the May 30, 1999 balance. The increase in working capital and inventories was primarily the result of the Pickles acquisition completed during the first quarter of fiscal 2000. The November 28, 1999 inventories were $17.0 million higher than inventories a year ago due to the inventory of acquisitions completed during fiscal 2000 and the latter half of fiscal 1999. Seasonal working capital requirements are funded using the Company's Commercial Paper Program, which was entered into during the fourth quarter of fiscal 1999. During fiscal 1999, prior to the Commercial Paper program, seasonal working capital requirements were funded utilizing the Company's Revolving Credit Agreement, which matures in 2003. The Company classifies Commercial Paper and Revolving Credit Agreement borrowings as long-term. At November 28, 1999 and May 30, 1999 there were no short-term borrowings outstanding. CASH FLOWS - Cash and temporary cash investments increased $9.0 million during the first half of fiscal 2000. Net cash provided from continuing operations was $77.9 million for the first six months of fiscal 2000 compared to $9.5 million in the prior year. The fiscal 2000 increase in net cash provided from continuing operations reflects higher operating earnings before depreciation and amortization and a reduction in the cash necessary to fund working capital requirements. Net cash used in investing activities was $109.4 million for first six months of fiscal 2000 versus $177.5 million in fiscal 1999. Fiscal 2000 investing activities include $37.3 million of cash paid for acquisitions and an equity investment compared to $120.7 million paid for acquisitions during the first six months of fiscal 1999. The Company continues to assess acquisition candidates in each of its business segments. Capital expenditures during the first half of fiscal 2000 are ahead of last year's spending, reflecting the Company's continued focus on investing in innovative product growth, improved production efficiencies and expansion of existing product lines. Fiscal 2000 investing activities also includes $4.4 million related to investment in the Company's enterprise-wide information systems initiative. Net cash provided by financing activities was $40.5 million for the six months ended fiscal 2000 versus net cash used in financing activities of $164.1 million in the prior year. Fiscal 2000 financing activities include $79.7 million of additional borrowings under the Company's Commercial Paper program. The Company purchased treasury shares totaling $23.8 million during fiscal 2000 and $32.9 million during the first six months of fiscal 1999. Fiscal 1999 financing activities included net debt repayments totaling $126.3 million, which includes the repayment of $70.0 million of Revolving Credit Agreement borrowings. Discontinued operations for the six months of fiscal 1999 generated net cash of $352.3 million, which included cash proceeds on the sale of the Vegetables segment of $365.0 million. 9 10 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 harvests, raw milk costs, 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 30, 1999. Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of November 28, 1999 there have been no material changes in the Company's market risk exposure as 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 30, 1999. 10 11 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 30, 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11 Basic and Diluted Income per Share 12 Computation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedules (b) Reports on Form 8-K None were filed. 11 12 SIGNATURE 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: January 12, 2000 William R. McManaman ---------------- ------------------------------- WILLIAM R. McMANAMAN Vice President, Finance and Chief Financial Officer 12