Dean Foods Announces First Quarter 2019 Results

DALLAS, May 7, 2019 /PRNewswire/ -- Dean Foods Company (NYSE: DF) today reported first quarter 2019 results.

Highlights

Q1 net loss per share was $0.67 and adjusted net loss per share was $0.41; represents sequential improvement from Q4 2018 with consecutive improvements each month within the quarter
Q1 GAAP and adjusted operating loss in-line with our internal expectations; internal plan projects continued sequential improvement each quarter throughout 2019
Anticipate positive free cash flow for FY 2019 with positive quarterly free cash flow for Q2 and in each quarter throughout the year; capital expenditures projected between $95 million and $115 million

Chief Executive Officer Ralph Scozzafava said, "The first quarter was a productive period setting the stage for the sequential improvement in our performance that we expect to achieve throughout 2019. Adjusted operating loss is on-track with our internal full year plan and marked an improvement from the fourth quarter of 2018 but was significantly down compared with the year-ago period. Our results improved in each month of the first quarter and we are encouraged by the underlying trends that we are seeing in operations. While we continue to overlap certain customer volume that exited our system last year, we believe we have passed the inflection point as the transformative actions implemented over the past 12 months through our enterprise-wide cost productivity plan are taking hold."

"We have the right plan that we are actively executing, which will improve our financial results. This plan will continue to drive and guide our actions throughout 2019 and beyond. We have made significant progress integrating our operating model, right-sizing our cost structure and introducing innovative new products. As a result of these actions, we expect to deliver positive free cash flow for full year 2019. Importantly, we are turning the corner and expect to generate positive quarterly free cash flow for the second quarter. While our results demonstrate that our efforts are beginning to achieve the desired results, there is still much more work to do. The refinancing of our revolving credit facilities in the first quarter provides us with the resources necessary to drive our commercial initiatives and continue to execute our enterprise-wide cost productivity plan. As previously announced, we are also exploring potential strategic alternatives to accelerate our business transformation and enhance value for our shareholders, our company and all other stakeholders," concluded Scozzafava.

First Quarter 2019 Operating Results

Financial Summary *	Three Months Ended March 31
(In millions, except per share amounts)	2019	2018

Gross Profit
GAAP	$ 374	$ 449
Adjusted	$ 374	$ 448

Operating Income (Loss)
GAAP	$ (45)	$ 15
Adjusted	$ (36)	$ 32

Interest Expense
GAAP	$ 19	$ 14
Adjusted	$ 15	$ 14

Net Income (Loss)
GAAP	$ (62)	$ —
Adjusted	$ (38)	$ 13

Earnings (Loss) Per Share (EPS)
GAAP	$ (0.67)	$ —
Adjusted	$ (0.41)	$ 0.14

* Adjustments to GAAP due to the exclusion of expenses, gains or losses associated with certain transactions and other non-recurring items are described and reconciled to the comparable GAAP amounts in the attached tables.

(1) Please refer to "Non-GAAP Financial Measures" for additional information. We provide guidance on a non-GAAP basis and are unable to provide a full reconciliation to GAAP without unreasonable efforts as we cannot predict the amount or timing of certain elements which are included in reported GAAP results, including mark-to-market adjustments of hedging activities, asset impairment charges, and other non-recurring events or transactions that may significantly affect reported GAAP results.

Cash Flow

Net cash used in operating activities for the three months ended March 31, 2019, totaled $72 million. Negative free cash flow used in operations was $99 million for the three months ended March 31, 2019, a $121 million decrease as compared to the prior year period driven by the first quarter operating loss and unfavorable working capital changes as a result of inventory builds associated with new business. Capital expenditures totaled $27 million for the three months ended March 31, 2019.

Net Debt

Total net debt at March 31, 2019, net of $23 million cash on hand, was approximately $991 million.

Non-GAAP Financial Measures

In addition to the results prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP"), we have presented certain non-GAAP financial measures, including adjusted gross profit, adjusted selling and distribution expenses, adjusted general and administrative expenses, adjusted total operating costs and expenses, adjusted operating income (loss), adjusted interest expense, adjusted net income (loss), adjusted earnings (loss) per diluted share, adjusted EBITDA, net debt and free cash flow, each as described below.

This non-GAAP financial information is provided as supplemental information for investors and is not in accordance with, or an alternative to, GAAP. Additionally, these non-GAAP measures may be different than similar measures used by other companies.

We believe that the presentation of these non-GAAP financial measures, when considered together with our GAAP financial measures and the reconciliations to the corresponding GAAP financial measures, provides investors with a more complete understanding of the factors and trends affecting our business than could be obtained absent these disclosures. Our management uses these non-GAAP financial measures when evaluating our performance, when making decisions regarding the allocation of resources, in determining incentive compensation for management, and in determining earnings estimates.

A full reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures for the three months ended March 31, 2019, and 2018, is set forth in the tables herein.

Adjusted Operating Results

We have supplemented the presentation of our reported GAAP gross profit, selling and distribution expenses, general and administrative expenses, total operating costs and expenses, operating income (loss), interest expense, net income (loss) and earnings (loss) per diluted share, with non-GAAP measures that adjust the GAAP measures to exclude the impact of the following (as applicable):

incremental non-cash trademark amortization triggered by the launch of a national fresh white milk brand;
facility closing, reorganization and realignment costs;
debt issuance costs;
gains (losses) on the mark-to-market of our derivative contracts;
costs associated with our enterprise-wide cost productivity plan;
separation costs;
operating income (loss) attributable to non-controlling interest;
income tax impacts of the foregoing adjustments; and
adjustments to normalize our income tax expense at a rate of 26.5%.

We believe these non-GAAP measures provide useful information to investors by excluding expenses, gains or losses that are not indicative of the company's ongoing operating performance. In addition, we cannot predict the timing and amount of gains or losses associated with certain of these items. We believe these non-GAAP measures provide more accurate comparisons of our ongoing business operations and are better indicators of trends in our underlying business. In addition, these adjustments are consistent with how management views our business. Management uses these non-GAAP financial measures in making financial, operating and planning decisions and evaluating the Company's ongoing performance. Further, adjusted gross profit and adjusted operating income are used by management to evaluate key performance indicators of brand mix and low cost, respectively.

Adjusted EBITDA

Adjusted EBITDA is defined as net income before interest expense, income tax expense, depreciation and amortization, as further adjusted to exclude the impact of the adjustments discussed under "Adjusted Operating Results" above (other than the adjustments for incremental trademark amortization and interest expense and the normalized income tax rate, as Adjusted EBITDA excludes the full amount of these expenses). This information is provided to assist investors in making meaningful comparisons of our operating performance between periods and to view our business from the same perspective as our management. We believe Adjusted EBITDA is a useful measure for analyzing the performance of our business and is a widely-accepted indicator of our ability to incur and service indebtedness and generate free cash flow. We also believe that EBITDA measures are commonly reported and widely used by investors and other interested parties as measures of a company's operating performance and debt servicing ability because such measures assist in comparing performance on a consistent basis without regard to capital structure, depreciation or amortization (which can vary significantly) and non-operating factors (such as historical cost).

Free Cash Flow

We define Free Cash Flow as net cash provided by operating activities less cash payments for capital expenditures. We believe Free Cash Flow is a meaningful non-GAAP measure that offers supplemental information and insight regarding the liquidity of our operations and our ability to generate sufficient cash flow to, among other things, repay debt, invest in our business and repurchase shares of our common stock. A limitation of Free Cash Flow is that it does not represent the total increase or decrease in the cash balance for the period.

Quarterly Free Cash Flow

We define Quarterly Free Cash Flow as net cash provided by operating activities for the three months ending June 30, September 30 and December 31 less cash payments for capital expenditures made within the respective three month periods. We believe Quarterly Free Cash Flow is a meaningful non-GAAP measure that offers supplemental information and insight regarding the liquidity of our operations within a quarter and our ability to generate sufficient cash flow within a particular period. A limitation of Quarterly Free Cash Flow is that it does not represent the total increase or decrease in the cash balance for the three-month period.

Conference Call/Webcast

A webcast to discuss the Company's financial results and outlook will be held at 9:00 a.m. ET today and may be heard live by clicking the earnings button on the Company's website at http://www.deanfoods.com. A slide presentation will accompany the webcast.

About Dean Foods

Dean Foods is a leading food and beverage company and the largest processor and direct-to-store distributor of fresh fluid milk and other dairy and dairy case products in the United States. Headquartered in Dallas, Texas, the Dean Foods portfolio includes DairyPure^®, the country's first and largest fresh, national white milk brand, and TruMoo^®, the leading national flavored milk brand, along with well-known regional dairy brands such as Alta Dena^®, Berkeley Farms^®, Country Fresh^®, Dean's^®, Friendly's^®, Garelick Farms^®, LAND O LAKES^®* milk and cultured products, Lehigh Valley Dairy Farms^®, Mayfield^®, McArthur^®, Meadow Gold^®, Oak Farms^®, PET^®**, T.G. Lee^®, Tuscan^® and more. Dean Foods also has a joint venture with Organic Valley^®, distributing fresh organic products to local retailers. In all, Dean Foods has more than 50 national, regional and local dairy brands as well as private labels. Dean Foods also makes and distributes ice cream, cultured products, juices, teas, and bottled water. Approximately 15,000 employees across the country work every day to make Dean Foods the most admired and trusted provider of wholesome, great-tasting dairy products at every occasion. For more information about Dean Foods and its brands, visit www.deanfoods.com.

*The LAND O LAKES brand is owned by Land O'Lakes, Inc. and is used by license.
**PET is a trademark of Eagle Family Foods Group LLC, under license.

Some of the statements made in this press release are "forward-looking" and are made pursuant to the safe harbor provision of the Private Securities Litigation Reform Act of 1995, including statements relating to: (1) our financial forecast, including projected sales (including specific product lines and the Company as a whole), total volume, price realization, profit margins, net income, earnings per share and free cash flow, (2) the Company's regional and national branding and marketing initiatives, (3) the Company's innovation, research and development plans and its ability to successfully launch new products or brands, (4) commodity prices and other inputs and the Company's ability to forecast or predict commodity prices, milk production and milk exports, (5) the Company's enterprise-wide cost productivity plan and other cost-savings initiatives, including plant closures and route reductions, and its ability to achieve expected savings, (6) planned capital expenditures, (7) the status of the Company's litigation matters, (8) the Company's plans related to its capital structure, (9) the Company's dividend policy, (10) possible repurchases of shares of the Company's common stock, (11) potential acquisitions, and (12) the Company's exploration of strategic alternatives and any potential results thereof. These statements involve risks and uncertainties that may cause results to differ materially from those set forth in this press release, including the risks disclosed by the Company in its filings with the Securities and Exchange Commission. Financial projections are based on a number of assumptions. Actual results could be materially different than projected if those assumptions are erroneous. The cost and supply of commodities and other raw materials are determined by market forces over which the Company has limited or no control. Sales, operating income, net income, debt covenant compliance, financial performance and earnings per share can vary based on a variety of economic, governmental and competitive factors, which are identified in the Company's filings with the Securities and Exchange Commission, including the Company's most recent Forms 10-K and 10-Q. The Company's ability to profit from its branding and marketing initiatives depends on a number of factors including consumer acceptance of its products. The declaration and payment of cash dividends under the Company's dividend policy remains at the sole discretion of the Board of Directors and will depend upon its financial results, cash requirements, future prospects, restrictions in its credit agreements and debt covenant compliance, applicable law and other factors that may be deemed relevant by the Board. All forward-looking statements in this press release speak only as of the date of this press release. There are no assurances that the Company's exploration of strategic alternatives will result in a transaction or other strategic change or outcome. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any such statements to reflect any change in its expectations with regard thereto or any changes in the events, conditions or circumstances on which any such statement is based except as required by law.

CONTACT: Investor Relations/External Communications, Suzanne Rosenberg, +1 214-303-3438. Media please contact +1 214-721-7766 or media@deanfoods.com.

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)

	Three Months Ended March 31
	2019	2018
Net sales	$ 1,795,434	$ 1,980,507
Cost of sales	1,421,681	1,532,004
Gross profit	373,753	448,503
Operating costs and expenses:
Selling and distribution	337,712	345,996
General and administrative	73,085	75,522
Amortization of intangibles	5,150	5,078
Facility closing and reorganization costs, net	4,332	8,462
Equity in (earnings) loss of unconsolidated affiliate	(1,955)	(1,900)
Total operating costs and expenses	418,324	433,158
Operating income (loss)	(44,571)	15,345
Other expense:
Interest expense	19,000	14,033
Other expense, net	212	470
Total other expense	19,212	14,503
Income (loss) before income taxes	(63,783)	842
Income tax expense (benefit)	(1,956)	1,107
Net loss	(61,827)	(265)
Net loss attributable to non-controlling interest	253	—
Net loss attributable to Dean Foods Company	$ (61,574)	$ (265)
Average common shares:
Basic	91,526	91,192
Diluted	91,526	91,192
Basic income (loss) per common share:
Net loss attributable to Dean Foods Company	$ (0.67)	$ —
Diluted income (loss) per common share:
Net loss attributable to Dean Foods Company	$ (0.67)	$ —

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)

	March 31, 2019	December 31, 2018
ASSETS
Cash and cash equivalents	$ 22,573	$ 24,176
Other current assets	912,689	888,104
Total current assets	935,262	912,280
Property, plant and equipment, net	991,825	1,006,182
Operating lease right of use asset	316,831	—
Intangibles and other assets, net	198,382	200,030
Total	$ 2,442,300	$ 2,118,492

LIABILITIES AND STOCKHOLDERS' EQUITY
Total current liabilities, excluding debt	$ 669,962	$ 699,661
Total long-term debt, including current portion	1,009,681	906,344
Total operating lease liabilities, including current portion	332,140	—
Other long-term liabilities	174,371	197,755
Total Dean Foods Company stockholders' equity	244,655	302,960
Non-controlling interest	11,491	11,772
Total stockholders' equity	256,146	314,732
Total	$ 2,442,300	$ 2,118,492

DEAN FOODS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

	Three Months Ended March 31
	2019	2018
Operating Activities
Net cash provided by (used in) operating activities	$ (72,046)	$ 38,953

Investing Activities
Capital spending	(26,518)	(16,508)
Proceeds from sale of fixed assets	1,928	4,179
Net cash used in investing activities	(24,590)	(12,329)

Financing Activities
Net proceeds from issuance (repayment of) debt	103,062	(6,274)
Payments of financing costs	(7,625)	—
Cash dividends paid	—	(8,218)
Issuance of common stock, net of share repurchases for withholding taxes	(404)	(519)
Net cash provided by (used in) financing activities	95,033	(15,011)
Change in cash and cash equivalents	(1,603)	11,613
Cash and cash equivalents, beginning of period	24,176	16,512
Cash and cash equivalents, end of period	$ 22,573	$ 28,125

DEAN FOODS COMPANY
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES*
(Unaudited)
(In thousands, except per share data)

	Three Months Ended March 31, 2019
		Asset write-downs and (gain) loss on sale of assets	Facility closing and reorganization costs, net	Mark-to-market on derivative contracts	Cost productivity plan	Non-controlling interest in Good Karma	Other adjustments	Income tax

	GAAP	(a)	(b)	(c)	(d)	(e)	(f)	(g)	Adjusted*
Gross profit	$ 373,753	$ —	$ —	$ (204)	$ —	$ —	$ —	$ —	$ 373,549

Selling and distribution	337,712	—	—	3,232	—	—	—	—	340,944

General and administrative	73,085	—	—	—	(3,599)	—		—	69,486

Amortization of intangibles	5,150	(3,935)	—	—	—	—	—	—	1,215

Total operating costs and expenses	418,324	(3,935)	(4,332)	3,232	(3,599)	—	—	—	409,690

Operating income (loss)	(44,571)	3,935	4,332	(3,436)	3,599	323	—	—	(35,818)

Interest expense	19,000	—	—	—	—	—	(3,755)	—	15,245

Net income (loss)	(61,827)	3,935	4,332	(3,436)	3,599	323	3,755	11,633	(37,686)

Diluted earnings (loss) per share	$ (0.67)	$ 0.04	$ 0.05	$ (0.04)	$ 0.04	$ —	$ 0.04	$ 0.13	$ (0.41)

	Three Months Ended March 31, 2018
		Asset write-downs and (gain) loss on sale of assets	Facility closing and reorganization costs, net	Mark-to-market on derivative contracts	Cost productivity plan	Other adjustments	Income tax

	GAAP	(a)	(b)	(c)	(d)	(f)	(g)	Adjusted*
Gross profit	$ 448,503	$ —	$ —	$ (445)	$ —	$ —	$ —	$ 448,058

Selling and distribution	345,996	—	—	(402)	—	—	—	345,594

General and administrative	75,522	—	—	—	(4,133)	(188)	—	71,201

Amortization of intangibles	5,078	(3,935)	—	—	—	—	—	1,143

Total operating costs and expenses	433,158	(3,935)	(8,462)	(402)	(4,133)	(188)	—	416,038

Operating income	15,345	3,935	8,462	(43)	4,133	188	—	32,020

Net income	(265)	3,935	8,462	(43)	4,133	188	(3,535)	12,875

Diluted earnings (loss) per share	—	0.04	0.09	—	0.05	—	(0.04)	0.14

* See Notes to Reconciliation of Non-GAAP Financial Measures

DEAN FOODS COMPANY
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES*
(Unaudited)
(In thousands)

	Three Months Ended March 31		Trailing Twelve Months Ended March 31,
	2019	2018	2019
Reconciliation of Net Income (Loss) to Adjusted EBITDA
Net loss	$ (61,827)	$ (265)	$ (388,920)
Interest expense	19,000	14,033	61,410
Income tax expense (benefit)	(1,956)	1,107	(45,346)
Depreciation and amortization	37,074	39,441	151,084
Asset write-downs and loss on sale of assets (a)	—	—	204,414
Facility closing and reorganization costs, net (b)	4,332	8,462	70,862
Mark-to-market on derivative contracts (c)	(3,436)	(43)	512
Discontinued operations	—	—	(4,872)
Cost productivity plan (d)	3,599	4,133	18,095
Non-controlling interest in Good Karma (e)	323	—	949
Other adjustments (f)	—	188	(2,272)
Adjusted EBITDA	$ (2,891)	$ 67,056	65,916

			March 31, 2019
Reconciliation of net debt
Total long-term debt, including current portion			$ 1,009,681
Unamortized debt issuance costs			4,299
Cash and cash equivalents			(22,573)
Net debt			$ 991,407

		Three Months Ended March 31
		2019	2018
Reconciliation of Free Cash Flow provided by (used in) operations
Net cash provided by (used in) operating activities		$ (72,046)	$ 38,953
Capital spending		(26,518)	(16,508)
Free Cash Flow provided by (used in) operations		$ (98,564)	$ 22,445

* See Notes to Reconciliation of Non-GAAP Financial Measures

*Notes to Reconciliation of Non-GAAP Financial Measures*

For the three months ended March 31, 2019, and 2018, the adjusted results and certain other non-GAAP financial measures differ from the Company's results under GAAP due to the exclusion of expenses, gains or losses associated with certain transactions and other non-recurring items that we believe are not indicative of our ongoing operating results. For additional information on our non-GAAP financial measures, see the section entitled "Non-GAAP Financial Measures" in this release.

(a)	The adjustment reflects the elimination of the following:

	i.	In conjunction with our decision to launch DairyPure^® in the first quarter of 2015, we reclassified certain of our indefinite-lived trademarks to finite-lived, resulting in a triggering event for impairment testing purposes. The related adjustment reflects the elimination of amortization expense recorded on these finite-lived trademarks of $3.9 million for each of the three months ended March 31, 2019 and 2018.

	ii.	Asset impairment charges on certain fixed assets of $13.7 million for the twelve months ended December 31, 2018. We evaluate our long-lived assets for impairment when circumstances indicate that the carrying value of an asset group may not be recoverable. Indicators of impairment could include, among other factors, significant changes in the business environment, the planned closure of a facility or a decline in operating cash flows of an asset group; and

	iii.	The full goodwill impairment charge of $190.7 million recorded in the three months ended December 31, 2018.

(b)	The adjustment reflects the elimination of severance charges and non-cash asset impairments, net of (gains) losses on related asset sales, for approved facility closings and restructuring plans.

(c)	The adjustment reflects the elimination of the (gain) loss on the mark-to-market of our commodity derivative contracts. All of our commodity derivative contracts are marked to market in our statement of operations during each reporting period with a corresponding derivative asset or liability on our balance sheet.

(d)	The adjustment reflects the elimination of certain direct expenses incurred as a result of our enterprise-wide cost productivity plan. The charges were $3.6 million and $4.1 million for the three months ended March 31, 2019 and March 31, 2018, respectively.

(e)	The adjustment reflects the elimination of the operating loss attributable to the non-controlling interest in Good Karma Foods, Inc. ("Good Karma").

(f)	The adjustment reflects the elimination of the following: The write off of unamortized deferred financing costs of $3.8 million in connection with the new credit agreement and amendment to our receivables securitization facility during the three months ended March 31, 2019; and Separation charges related to the previously disclosed departures of certain executive officers of $0.2 million in the three months ended March 31, 2018.

(g)	The adjustment reflects the income tax impact of adjustments (a) through (f) as well as an adjustment to our income tax expense, reflective of an income tax rate of 26.5% for the three months ended March 31, 2019 and March 31, 2018, respectively. We believe this rate represents our long-term normalized tax rate as a U.S. domiciled business. Our effective tax rate on a GAAP basis was 3.1% and 131.5% for the three months ended March 31, 2019 and March 31, 2018, respectively.