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Dean Foods (NYSE:DF) reported relatively strong third-quarter results with earnings of 34 cents per share. Quarterly earnings were up 21% year-over-year.

Quarterly net sales declined 13.2% year over year to $2.7 billion due to the pass-through of lower overall dairy commodity costs, despite positive contributions from acquisitions and lower net sales volumes in the WhiteWave-Morningstar operations, which were partially offset by acquisition-related volume growth in Fresh Dairy Direct and WhiteWave-Morningstar.

Net sales in the Fresh Dairy Direct segment declined 18.3% as the company passed some of the lower dairy costs to customers but were partially offset by continued volume growth. Raw milk prices were 45% lower compared to the prior-year.

Net sales at WhiteWave-Morningstar increased 5.7% to $709 million, driven the Alpro acquisition, partially offset by the exit of a foodservice relationship in the Silk® brand and the exit of some private label organic milk products in the United Kingdom.

Furthermore, market share increased across all key areas of the branded portfolio during the quarter. International Delight and Land O'Lakes brands increased in the mid-single digits driven by strong performance of Coffeehouse Inspirations. Silk soymilk sales also increased low-single digits. Horizon Organic milk net sales decreased marginally year-over-year.

Gross margin for the quarter increased 551 basis points (bps) to 28.4% versus 22.9% in the prior-year quarter. The increase was primarily driven by moderating commodity costs and benefits of cost savings. The operating margin for the quarter expanded 81 bps to 5.0%, compared to 4.1% in the prior-year period.

Year-to-date net cash provided by continuing operations totaled $502.7 million, representing a 9.6% increase compared to $458.7 million in the prior-year period. Capital expenditures for the first nine months of 2009 amounted to $171 million.

Following the earnings release, management raised its guidance for fiscal 2009. Annual earnings are now expected to be at least $1.63 per share -- roughly 20% above year-ago levels. Previous guidance was $1.60 per share.

Although commodity costs continue to be favorable, management is concerned about the continued competitive activity in fluid milk operations and is cautious regarding diminished commodity favorability in the future. Earnings for the third quarter are expected to be 36 cents per share.