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Dean Foods Company (DF - Analyst Report) reported adjusted earnings from continuing operations of 13 cents per share for the second quarter of 2013, which is within the company’s own guidance range of 11—15 cents. However, the quarterly adjusted earnings fell short of the Zacks Consensus Estimate by a penny.

On a year-over-year basis, the company’s adjusted earnings came a penny ahead of the year-ago comparable quarter’s earnings of 12 cents per share. The improved bottom-line result was mainly driven by Dean Foods’ sustained focus on cost control and better productivity.

This Zacks Rank #3 (Hold) company’s adjusted earnings does not include the income from its former subsidiary, The WhiteWave Foods Company (WWAV - Snapshot Report). In Jul 2013, Dean Foods successfully completed the spin-off of its subsidiary. We believe that such strategic moves will boost the company’s shareholder value and offer growth opportunities for both Dean Foods and WhiteWave.

On a reported basis, the company registered a loss of 17 cents per share from continuing operations compared with earnings of 10 cents posted in the year-ago comparable quarter.

Quarter in Detail

Dean Foods’ adjusted net sales inched down 0.7% year over year to $2,227.5 million compared with net sales of $2,244.2 million in the comparable prior-year quarter. As per the data from USDA and the estimates of the company, the marginal fall in the top line is owing to a decline in the overall industry volumes for fluid milk and a fall of 140 basis points in the company’s market share for U.S. fluid milk to 36.4%. Moreover, the company’s quarterly net sales were almost in line with the Zacks Consensus Estimate of $2,228.0 million.

Adjusted operating income for the quarter decreased 9.4% to $64.7 million from the prior-year quarter’s $71.7 million. Consequently, Dean Foods’ adjusted operating margin for the quarter contracted 30 basis points to 2.9% compared with 3.2% in the prior-year quarter.

The year-over-year decline in operating income was primarily due to reduced sales and higher raw milk costs, partially offset by the company’s cost saving initiatives. The raw milk cost of Class I Mover registered a year-over-year increase of 16% to $18.12 per hundred-weight.

Dean Foods is striving to achieve its targeted goal of saving costs worth $120 million in fiscal 2013. The cost saving initiatives announced in the fourth quarter of fiscal 2012 include eight to twelve or 10%–15% of the company’s manufacturing facilities, expected to be achieved by mid 2014.

The company ended the quarter with cash and cash equivalents of $26.0 million, long-term debt of $1,240.1 million and shareholders’ equity of $661.5 million. During the first six month of 2013, the company used $230.9 million of net cash for continuing operations, while free cash flow used in continuing operations was $294.1 million.

Further, the company remains focused on curtailing its overall leverage. As of the end of the first quarter, the company's funded debt to EBITDA ratio, as defined by its credit agreements, was 2.69 times, lower than its maximum leverage covenant ratio of 5.25 times, which suggests that the company possesses adequate financial flexibility to service its debt.

Outlook

Looking at the current industry volume trends, Dean Foods expects volumes to decline more than anticipated.

However, the company is focusing on efficiency and leverage reduction to drive both operating income and earnings per share. The company anticipates operating income to rise in the low-single digit range, lower than the previous guidance range of low-to-mid single digit growth. Moreover, EBITDA for 2013 is expected to range between $410 million and $430 million.

Further, Dean Foods narrowed its earnings guidance range for full-year 2013 to 47–53 cents per share from 45–55 cents guided earlier. For the third quarter, the company anticipates adjusted earnings in the range of 5 cents to 8 cents per share.

Other Stocks Worth Considering

Besides Dean Foods, other stocks worth considering in the food category business include Boulder Brands, Inc. (BDBD - Snapshot Report) and Kraft Foods Group, Inc. (KRFT - Analyst Report). Both the stocks carry a Zacks Rank #2 (Buy).

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