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 24, 1997 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 0-1118 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 40,581,423. 1 2 PART I - FINANCIAL INFORMATION A. UNAUDITED CONDENSED CONSOLIDATION FINANCIAL STATEMENTS 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 1997 Annual Report on Form 10-K. 2 3 ITEM 1. CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED AUGUST 24, 1997 AND AUGUST 25, 1996 (In Thousands Except for Per Share Amounts) Three Months Ended ------------------------------- August 24, August 25, 1997 1996 ---------- ---------- (Unaudited) Net sales $729,453 $710,052 Costs of products sold 558,940 550,159 Delivery, selling and administrative expenses 129,871 123,812 -------- -------- Operating earnings 40,642 36,081 Interest expense (5,727) (6,249) Interest income 409 270 -------- -------- Income before income taxes 35,324 30,102 Provision for income taxes 13,777 12,192 -------- -------- Net income $ 21,547 $ 17,910 ======== ======== Net income per common share $ .53 $ .45 ======== ======== Dividends per share (Declared and paid) $ .20 $ .19 ======== ======== Weighted average common shares 40,427 40,142 ======== ======== See accompanying Notes to Condensed Consolidated Financial Statements. 3 4 CONDENSED CONSOLIDATED BALANCE SHEETS AUGUST 24, 1997 AND MAY 25, 1997 (In Thousands) August 24, May 25, 1997 1997 ---------- -------- (Unaudited) ASSETS - ------ CURRENT ASSETS: Cash and cash equivalents $ 24,128 $ 4,386 Accounts and notes receivable, less allowance for doubtful accounts of $3,707 and $3,585, respectively 189,826 210,528 Inventories 299,493 265,691 Other current assets 72,254 81,528 ---------- ---------- Total Current Assets 585,701 562,133 ---------- ---------- PROPERTIES: Property, plant and equipment, at cost 1,079,244 1,049,528 Accumulated depreciation 534,990 522,355 ---------- ---------- 544,254 527,173 ---------- ---------- OTHER ASSETS 151,309 128,052 ---------- ---------- Total Assets $1,281,264 $1,217,358 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable to banks $ 52,000 $ 3,000 Current installments of long-term obligations 13,374 13,369 Accounts payable and accrued expenses 297,781 313,374 Dividends payable 8,201 7,738 Federal and state income taxes 27,985 16,620 ---------- ---------- Total Current Liabilities 399,341 354,101 LONG-TERM OBLIGATIONS 211,653 211,926 DEFERRED LIABILITIES 79,796 83,650 SHAREHOLDERS' EQUITY 590,474 567,681 ---------- ---------- Total Liabilities and Shareholders' Equity $1,281,264 $1,217,358 ========== ========== See accompanying Notes to Condensed Consolidated Financial Statements. 4 5 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED AUGUST 24, 1997 AND AUGUST 25, 1996 (In Thousands) Three Months Ended ---------------------------- August 24, August 25, 1997 1996 ---------- ---------- (Unaudited) Net cash provided from operations $ 39,018 $ 32,017 -------- --------- Cash flows from investing activities: Capital expenditures (30,751) (19,859) Proceeds from disposition of property, plant and equipment 319 661 Acquisition of business, net of cash acquired (41,923) - -------- --------- Net cash used in investing activities (72,355) (19,198) -------- --------- Cash flows from financing activities Repayment of long-term obligations (293) (574) Issuance (repayment) of notes payable to banks, net 49,000 (10,000) Unexpended industrial revenue bond proceeds 2,976 744 Cash dividends paid (7,650) (7,221) Issuance of common stock 9,046 723 -------- --------- Net cash provided by (used for) financing activities 53,079 (16,328) -------- --------- Increase (decrease) in cash and cash equivalents 19,742 (3,509) Cash and cash equivalents - beginning of period 4,386 10,399 -------- --------- Cash and cash equivalents - end of period $ 24,128 $ 6,890 ======== ========= See accompanying Notes to Condensed Consolidated Financial Statements. 5 6 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. INVENTORIES The following is a tabulation of inventories by class at August 24, 1997, August 25, 1996, and May 25, 1997 (In Thousands). August 24, August 25, May 25, 1997 1996 1997 ---------- ---------- ------- (Unaudited) Raw materials and supplies $ 39,437 $ 48,062 $ 52,321 Materials in process 78,923 93,964 59,846 Finished goods 198,962 203,415 172,353 --------- --------- -------- 317,322 345,441 284,520 Less: Excess of current cost over stated value of last-in, first-out inventories 17,829 16,434 18,829 --------- --------- -------- Total inventories $299,493 $329,007 $265,691 ========= ========= ======== 2. BUSINESS SEGMENT INFORMATION The following is a tabulation of the Company's business segment information for the first quarters ended August 24, 1997 and August 25, 1996 (In Thousands). (Unaudited) --------- Dairy Vegetables Pickles Specialty Corporate Consolidated --------- ---------- -------- --------- ------------ ----------------- AUGUST 24, 1997 Net sales $455,962 $109,597 $90,460 $73,434 $ - $729,453 Operating earnings (loss) $ 32,413 $ (2,525) $ 9,322 $10,993 $ (9,561) $ 40,642 AUGUST 25, 1996 Net sales $432,281 $114,307 $95,848 $67,616 $ - $710,052 Operating earnings $ 26,120 $ 956 $ 7,934 $ 8,431 $ (7,360) $ 36,081 3. 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 A.) Liquidity and Capital Resources As of August 24, 1997 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 25, 1997. Cash and cash equivalents were $24.1 million at August 24, 1997, an increase of $19.7 million from the balance at May 25, 1997. The inventories at August 24, 1997 were $299.5 million, an increase of $33.8 million over the balance at May 25, 1997, reflecting the typical seasonal increase resulting from the vegetable and cucumber harvests. The August 24, 1997 inventories were $29.5 million lower than inventories a year ago reflecting the planned reduction of inventories in the Vegetables and Pickles segments. Short-term borrowings outstanding at August 24, 1997, were $52.0 million, an increase of $49.0 million from the balance outstanding at May 25, 1997. Working capital at August 24, 1997 was $186.4 million compared to $208.0 million at May 25, 1997. The increase in short-term borrowings and the decrease in working capital were primarily the result of increased borrowings associated with a business acquisition and higher capital expenditures during the quarter ended August 24, 1997. The Company's debt-to-capital ratio was 31.9% at August 24, 1997 compared with 28.7% at May 25, 1997. B.) Results of Operations Net Sales Net sales for the first quarter were $729.5 million, a 2.7% increase over the same period last year, principally due to the inclusion of sales generated by fiscal year 1997 and 1998 acquisitions in the Dairy and Specialty segments as well as volume growth in each of these segments. Dairy sales of $456.0 million were 5.5% higher than sales of $432.3 million in the prior year largely due to increased volume from two fiscal year 1997 acquisitions in the fluid milk and ice cream operations. Sales in the Vegetables segment for the quarter ended August 24, 1997 declined $4.7 million, or 4.1%, compared to the prior year. Case volume and overall pricing were down slightly compared to first quarter of fiscal year 1997. Contributing to the reduction in sales, was the shift of promotional activities from the first quarter, which is a seasonally light sales quarter, to later in the fiscal year. The Pickles segment reported net sales of $90.5 million for the quarter ended August 24, 1997. This represents a 5.6% decline from the same period one year ago as the business continues to focus on identifying and eliminating unprofitable products and customers. First quarter sales in fiscal 1998 were $73.4 million in the Specialty segment, an 8.6% increase over the first quarter last year. This increase was led by the Dean Dip and Dressing 7 8 Company, which includes the Marie's refrigerated salad dressings business acquired at the beginning of fiscal 1998. Operating Earnings Operating earnings for the first quarter of fiscal 1998 were $40.6 million, or 12.6% higher than operating earnings of $36.1 million during the first quarter of fiscal 1997. The increase in operating earnings was driven largely by increased earnings in the Dairy, Pickles and Specialty segments. Dairy segment operating earnings of $32.4 million were 24.1% higher than the operating earnings of $26.1 million in the prior year. Operating earnings from the fluid milk operations were slightly less than the earnings in the first quarter last year, which had benefited from changes in raw milk costs. Ice cream operations improved quarter to quarter due to both higher pricing and volume, as well as the contribution of an acquisition made in late fiscal 1997. Extended shelf life operating earnings improved significantly due to increased volume and improved margins. The Vegetables segment reported a $2.5 million operating loss for the first quarter of fiscal 1998 versus $1.0 million of operating earnings in the first quarter of fiscal 1997. Certain promotional activities were shifted to later in fiscal year 1998 and product mix was unfavorable, both contributing to reduced earnings. First quarter fiscal 1998 operating earnings for the Pickles segment improved $1.4 million, or 17.5%, to $9.3 million in the quarter as a result of enhanced operating and promotional spending efficiencies. Specialty segment operating earnings of $11.0 million were 30.4% higher than operating earnings of $8.4 million in the prior fiscal year, primarily due to improved operating efficiencies in the Dean Dip and Dressing operation, as well as the contribution from the recent acquisition of the Marie's refrigerated salad dressing business. Corporate Corporate expenses increased to $9.6 million in the first quarter of fiscal 1998 from $7.4 million in the same period last year. This increase was primarily related to the incentive and equity-based compensation programs of the Company. Interest Expense Interest expense in the first quarter of fiscal year 1998 totaled $5.7 million, which was 8.4% lower than the interest expense in the first quarter of fiscal 1997. The decline is due to the overall reduction in average debt levels. Income Taxes The effective income tax rate for the first quarter was 39.0% compared with a rate of 40.5% in the first quarter a year ago. The decrease in the rate is largely due to reductions in state income taxes, and increased export and research and development incentives. 8 9 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 Form 10-K Annual Report, for the fiscal year ended May 25, 1997. ITEM 6. Exhibits and Reports on Form 8-K a.) Exhibits Item 12 - Computation of Ratio of Earnings to Fixed Charges Item 27 - Financial Data Schedules b.) Reports on Form 8-K The Company filed a Current Report on Form 8-K, dated September 24, 1997, with regards to the Company's Press Release dated September 24, 1997, "Marineau Resigns As Dean Foods President". 9 10 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: September 29, 1997 William R. McManaman ------------------ ------------------------ WILLIAM R. McMANAMAN Vice President, Finance and Chief Financial Officer DATE: September 29, 1997 William M. Luegers, Jr. ------------------ ------------------------ WILLIAM M. LUEGERS, JR. Controller 10