Dean suffers $1.5 billion loss on impairment charge

by Keith Nunes
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DALLAS — A goodwill impairment charge led the Dean Foods Co. to record a loss of $1,540,497,000 during the third quarter of fiscal 2011, ended Sept. 30. This compared with net income of $24,296,000, equal to 13c per share on the common stock, in the same period a year ago. On an adjusted basis, Dean Foods earned $33,252,000, or 18c per share, an improvement compared with the same period of the previous year when Dean Foods earned $23,253,000, or 13c per share.

“Like many companies that were built through a series of acquisitions, the Fresh Dairy Direct business accumulated a large amount of goodwill on its balance sheet,” said Gregg Engles, chairman and chief executive officer, discussing the third-quarter impairment charge. “As we've discussed over the past few years, changed economic conditions have resulted in increased challenges for the fresh milk processing industry. Industry-wide volume declines and price erosion have lowered the profit outlook for our fresh dairy business. As a result of these challenges, and our view that they are unlikely to improve materially, we performed an interim goodwill analysis of the Fresh Dairy Direct business. This analysis determined the fair value of the Fresh Dairy Direct reporting unit was below its carrying value.”

The company added that the recorded charge represents the lower end of an estimated range, as a significant amount of work remains to be done to arrive at the final charge. Dean Foods said it expects to complete the necessary work and adjust the charge in the fourth quarter. The final charge could differ materially from the estimate recorded in the third quarter.

Sales for the third quarter of this year were $3,410,797,000, up 12% from $3,054,130,000 in the same period last year.

During the quarter the Fresh Dairy Direct-Morningstar business unit’s sales increased 12% to $2.9 billion compared to the third quarter of fiscal 2010. The company said the sales increase was due to the pass-through of higher dairy commodity costs.

Within Dean Foods’ Whitewave-Alpro business sales were $531 million during the quarter, up 11% from the previous year. Operating income for the business unit was $52 million, 39% ahead of the same period last year.

“Looking ahead, recent trends continue across the business,” Mr. Engles said. “Fresh Dairy Direct-Morningstar continues to face a difficult volume and pricing environment. We expect this to continue into the fourth quarter. However, results should benefit from our continued focus on cost reduction across the business, moderating dairy and other commodity costs, and typical fourth quarter seasonality that has a beneficial mix component.

“At WhiteWave-Alpro, strong top-line trends continue as we enter the seasonally strongest quarter of the year. We therefore expect WhiteWave-Alpro to have a solid end to the year, with full year segment operating income to grow in the high-teens.

“Corporate costs will continue to be a tailwind for the business as our sharp focus on SG&A reduction will drive significant year-over-year savings in the fourth quarter. All in, we expect fourth-quarter adjusted diluted earnings per share to step up from third-quarter levels to between 20c and 25c per share resulting in full-year 2011 adjusted diluted earnings per share of between 69c and 74c per share.”

For the first nine months of fiscal 2011, on an adjusted basis, Dean Foods earned $90,344,000, or 49c per share, down 25% from $119,717,000, or 66c per share, in the same period of fiscal 2010.

Adjusted sales for the period were $9,759,459,000, which compared with sales of $8,969,926,000 the previous year.

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