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Dean Foods Company (DF - Analyst Report) reported adjusted earnings from continuing operations of 12 cents per share for the third quarter of 2013, which was within the company’s own guidance range of 5–8 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 were below the year-ago comparable quarter figure of 14 cents per share. The lackluster bottom-line results were mainly due to rise in raw milk costs.

This Zacks Rank #3 (Hold) company’s adjusted earnings do not include the income from its former subsidiary, The WhiteWave Foods Co. (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’s earnings came in at $4.35 per share from continuing operations as against a loss of 2 cents in the year-ago comparable quarter.

Quarter in Detail

Dean Foods’ adjusted net sales declined 2.0% year over year to $2,200.9 million from $2,246.5 million in the comparable prior-year quarter. As per the data from the U.S. Department of Agriculture (USDA) and the estimates of the company, the marginal fall in the top line was owing to a decline in the overall industry volumes for fluid milk and a fall of 150 basis points (bps) in the company’s market share for U.S. fluid milk to 34.9%. Moreover, the company’s quarterly net sales were slightly higher than the Zacks Consensus Estimate of $2,190.0 million.

Adjusted operating income for the quarter decreased 26.7% to $41.6 million from the prior-year quarter figure of $56.8 million. Consequently, Dean Foods’ adjusted operating margin for the quarter contracted 60 bps to 1.9% compared with 2.5% in the prior-year quarter.

The year-over-year decline in operating income was primarily due to reduced sales and higher raw milk costs, which were partially mitigated by the company’s cost saving initiatives. The raw milk cost of Class I Mover registered a year-over-year increase of 15% to $18.98 per hundred-weight.

Dean Foods is striving to achieve its targeted goal of generating cost savings of $120 million in fiscal 2013. The cost cutting measures that were announced in the fourth quarter of fiscal 2012 pertain to eight to twelve manufacturing facilities or 10%–15% of the company’s total manufacturing facilities. The company expects to reap the success of these measures by mid 2014.

The company ended the quarter with cash and cash equivalents of $360.6 million, long-term debt of $1,031.6 million and shareholders’ equity of $706.1 million. During the first nine months of 2013, the company spent $349.0 million of net cash for continuing operations, while free cash flow used in continuing operations was $244.5 million.

Further, the company remains focused on curtailing its overall leverage. At the reported quarter-end,  the company's funded debt to earnings before interest, taxes, depreciation and amortization (EBITDA) ratio, as defined by its credit agreements, was 1.64 times, which was much lower than its maximum leverage covenant ratio of 5.25 times. This indicates the company’s 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. Additionally, EBITDA for 2013 is expected to range between $391 million and $400 million.

Further, Dean Foods expects its full-year 2013 earnings to come in the range of 85 cents to 91 cents per share. For the fourth quarter, the company forecasts adjusted earnings in the range of 17 cents to 23 cents per share.

Other Stocks Worth Considering

Better-placed stocks in the food category business include Pinnacle Foods Inc. (PF - Snapshot Report) and The J. M. Smucker Co. (SJM - Analyst Report). Both of these carry a Zacks Rank #2 (Buy).

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