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Dean Foods Company (DF - Analyst Report) reported adjusted earnings of 36 cents per share for the second quarter of fiscal 2012, beating the Zacks Consensus Estimate of 31 cents a share. The company’s quarterly earnings doubled compared with the year-ago earnings of 18 cents per share. On a reported basis, including one-time items, the company registered earnings of 30 cents per share versus a loss of 28 cents in the prior-year quarter.

Robust second quarter results reflect continued growth momentum across the company’s business segments as well as a stringent focus on cost control.

Quarter in Detail

Dean Foods’ net sales dipped 5.3% year over year to $3,125.5 million compared with net sales of $3,298.8 million in the prior-year quarter. The decline was primarily a pass-through of lower dairy commodity costs, offset partly by strong top-line performance at WhiteWave-Alpro. The company’s quarterly net sales also missed the Zacks Consensus Estimate of $3,241 million.

Segment-wise, during the reported quarter, Dean Foods’ Fresh Dairy Direct sales declined 10% to $2.2 billion while WhiteWave-Alpro’s sales climbed 11% to $573 million. Top line results at the company’s Morningstar segment were almost flat compared to last year’s net sales of $345 million.

Adjusted operating income for the second quarter increased 36.9% to $156.5 million from the prior-year quarter’s $114.3 million. The improved results were primarily due to an increase in operating income of 31%, 41% and 19% at WhiteWave-Alpro, Fresh Dairy Direct and Morningstar, respectively. Operating income growth was also attributed to disciplined expense control in all fronts throughout the organization.

Consequently, Dean Foods’ adjusted operating margin for the quarter expanded 150 basis points to 5.0% compared with 3.5% in the prior-year quarter.

Dean Foods ended the quarter with cash and cash equivalents of $60.4 million, long-term debt of $3,552.0 million and shareholders’ equity deficit of $3.1 million. During the six-month period, the company generated $238.7 million of cash from operation, while free cash flow totaled $143 million. Capital expenditures for the six month period decreased to $96 million compared with $119 million in the year-ago period.

Further, the company remains focused on curtailing its overall leverage. As of the end of the second quarter, the company's funded debt to EBITDA ratio as defined by its credit agreements declined to 3.96x, below its maximum leverage covenant ratio of 5.50x.

WhiteWave Foods’ IPO

Concurrent to the earnings release, the company announced that its wholly-owned subsidiary, The WhiteWave Foods Company, has proposed an initial public offering (IPO) of up to 20% of its common shares and has also filed to register with the U.S. Securities and Exchange Commission regarding the same. Subsequent to the IPO, The WhiteWave Foods Company will own Dean Foods' WhiteWave-Alpro business, while Dean Foods will hold a minimum of 80% of The WhiteWave Foods Company's shares.

Additionally, Dean Foods stated that it expects to use the proceeds from the offering as well as about $800-$925 million, planned to be borrowed under The WhiteWave Foods Company’s new credit facility, to reduce its debt levels. Consequently, if the transaction is completed, the company expects to lower its year-end leverage ratio to nearly 3.5x debt to EBITDA, as defined by its credit agreements. The company expects to complete the transaction in the fourth quarter of 2012.

However, if the transaction fails to culminate, the company’s year-end leverage ratio is expected to be roughly 3.75x.

Outlook

Looking forward to the rest of the year, Dean Foods expects the momentum of the first half of 2012 to continue across all its business segments. The company expects the WhiteWave segment to deliver strong volume-driven sales growth and operating leverage.

Further, the company expects the Fresh Dairy Direct business to deliver operating income growth in the mid to high-teens range for the full year, driven by strong volume growth, price realization, and cost efficiency. The company also expects full-year operating income growth at Morningstar in mid-teens range, on account of solid customer growth, new product innovations, and a focused approach.

In a nutshell, the company expects such performance at the segments along with continued focus on efficiency and leverage reduction to drive both operating income and earnings per share growth. Adjusted earnings in the third quarter are expected in the range of 25 cents to 30 cents per share. Consequently, the company guided full-year earnings per share in the $1.18–1.28 range.

Dean Foods, which competes with Kraft Foods Inc. , currently has a Zacks #3 Rank, implying a short-term Hold rating on the stock. However, we have a long-term Outperform recommendation on the stock.

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