Fitch downgrades its rating of Dean Foods Company’s (Dean) senior unsecured notes to ‘BBB+’ from ‘A-‘ and affirms its commercial paper rating at ‘F2’. Both the short-term and long-term ratings are placed on Rating Watch Evolving following Dean’s announcement that it is exploring strategic and financial alternatives. The Rating Watch status will be resolved following Fitch’s assessment of the strategic and financial actions selected by the company and a determination of the impact on Dean’s operations and capital structure.
The rating downgrade reflects weaker-than-expected financial and operating performance throughout the 2001 fiscal year, as well as increased uncertainty around the company’s ability to achieve management’s forecast.
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The company has reduced earnings expectations from its fluid milk operations as volumes declined due to increased competition and higher raw material costs. In spite of an alliance with Baskin-Robbins, Dean Foods expects only modest benefits in the fourth quarter of its fiscal 2001 ice cream operations, due to higher raw material cost. In addition, the Dairy division has incurred incremental costs associated with integrating operations that were previously acquired. The company’s National Refrigerated Products (NRP) division is experiencing higher-than-anticipated costs to support the growth of extended and intermediate shelf-life products and higher-than-projected promotional spending. The Specialty Foods Group is enduring increased competitive activities and slower-than-expected new product introductions, as well as increased costs associated with consolidation of regional brands.
The company believes that certain factors will have a positive impact on fiscal 2002 earnings. Further rationalization of assets, price increases, and a full year of supplying Baskin- Robbins are expected to aid the Dairy group. Dean also anticipates that NRP expects profits to improve from strong sales growth, improvement in intermediate and extended shelf life production, lower marketing costs and increased pricing on certain products. Brand consolidation and pickle price increases are also likely to have a positive impact operating earnings.
For the latest 12 months ended Nov. 26, 2000, leverage (total debt/EBITDA) was 3.1 times (x) and EBITDA coverage of interest incurred was 5.6x. Credit protection measures are expected to improve from these levels. However, weaker operating performance and slower debt repayment have reduced the pace and level of improvement expected by Fitch. While leverage is expected to return to fiscal 2000 levels within the next 18 months, coverage will lag historical levels.
In a highly fragmented and competitive market, Dean Foods is one of the leading processors of milk and a leading producer of ice cream in the United States. The company is also one of the largest pickle producer and marketers in the United States with sales nationwide. Approximately 50% – 60% of the company’s products are sold as private labels. In fiscal year 2000, dairy products accounted for 76% of revenues and 56% of operating income, specialty foods accounted for 17% and 30%, and national refrigerated products 7% and 14%, respectively.
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