Post Holdings, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019; filed November 22, 2019. This is an annual report, not a standalone fourth-quarter report. Post is a consumer packaged goods holding company with cereal, foodservice, refrigerated retail and convenient nutrition businesses.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $5,681.1 million | $6,257.2 million |
| Gross profit / margin | $1,792.1 million / 31.5% | $1,854.0 million / 29.6% |
| Operating profit / margin | $781.0 million / 13.7% | $573.5 million / 9.2% |
| Net earnings | $124.7 million | $467.3 million |
| Diluted earnings per share | $1.66 | $6.16 |
| Cash from operating activities | $688.0 million | $718.6 million |
| Capital expenditures | $273.9 million | $225.0 million |
| Cash and cash equivalents at year-end | $1,050.7 million | $989.7 million |
- Reported net sales fell 9%, primarily because the former Private Brands business was deconsolidated after the October 1, 2018 8th Avenue transaction; FY2018 included $848.9 million of that business’s sales. The filing says sales increased in several continuing segments, so the consolidated decline should not be read as an equivalent decline in the continuing businesses.
- Operating profit rose 36%, but included a $126.6 million gain on the 8th Avenue transaction and $63.3 million in impairment charges. The prior year included $124.9 million of impairment charges. Management said operating profit increased only slightly after excluding these items and other specified impacts.
- Net earnings declined substantially, in part because FY2019 included $306.6 million of swap expense, mainly non-cash mark-to-market losses, versus $95.6 million of swap income in FY2018. FY2018 net earnings also benefited from a $204.0 million income tax benefit, primarily related to U.S. tax reform.
- Principal debt was $7,119.3 million at September 30, 2019; reported debt on the balance sheet, net of debt issuance costs and including unamortized premium, was $7,066.0 million. The revolving credit facility had $780.5 million of available capacity. Working capital, excluding cash and specified items, was $282.4 million, down from $435.8 million.
- Operating cash flow decreased $30.6 million year over year, including increased inventory investment, higher income-tax payments and legal settlements. Investing activities provided $26.7 million, including proceeds associated with 8th Avenue; financing activities used $652.4 million, including debt repayment, appraisal-rights payments and share repurchases.
Segments and material changes
- Post Consumer Brands: Sales increased 2% to $1,875.9 million; segment profit increased 2% to $337.1 million. Price and volume gains were partly offset by higher raw material, freight and manufacturing costs.
- Weetabix: Sales declined 1% to $418.2 million, including unfavorable currency effects; segment profit increased 9% to $94.8 million, helped by pricing and reduced promotions.
- Foodservice: Sales increased 5% to $1,627.4 million; segment profit increased 26% to $198.4 million, with volume growth and favorable product and customer mix cited as contributors.
- Refrigerated Retail: Sales increased 15% to $907.3 million, reflecting Bob Evans acquisition contributions; segment profit increased 6% to $95.1 million. Margin declined to 10% from 11%.
- Active Nutrition: Sales increased 3% to $854.4 million; segment profit increased 41% to $175.1 million. RTD beverage growth and lower product costs helped, while nutrition-bar sales fell 32%.
- Effective October 1, 2018, Post deconsolidated 8th Avenue, retaining a 60.5% common-equity interest accounted for under the equity method. Post recorded a $126.6 million gain, but also a $37.0 million equity-method loss, net of tax, in FY2019.
- On October 21, 2019, after year-end, BellRing Brands completed an IPO. Post retained 71.2% of BellRing Brands, LLC units and voting control under the disclosed ownership arrangements; BellRing’s public company held a 28.8% economic interest. The IPO and related financing transactions occurred after the balance-sheet date and affect the forward-looking capital structure.
Outlook, risks and unusual items
- Management said it expects cash on hand, operating cash flows and current or possible future credit facilities to cover foreseeable working-capital, interest, capital expenditure, pension and other financing needs. The filing provides no clear numerical consolidated guidance target in the supplied text.
- Key risks include substantial leverage and debt-service requirements; intense competition and changing consumer preferences; volatile commodity, freight and energy costs; customer concentration (Walmart represented about 21% of consolidated sales); dependence on third-party manufacturers; food safety and regulatory exposure; and potential impairment of goodwill or intangible assets.
- FY2019 impairments included $48.7 million of goodwill related to the cheese reporting unit and $14.6 million for the All Whites trademark, which was written down to zero after management decided to discontinue the brand. The Bob Evans trademark’s estimated fair value exceeded its carrying value by 13%, according to the filing.
- Remaining egg-product antitrust claims involving three opt-out plaintiffs could still have a material adverse outcome; Post disclosed a $6.2 million accrual. Bob Evans appraisal proceedings were settled and dismissed in October 2019. A U.K. court imposed a $0.1 million fine, plus costs, for a pre-acquisition diesel spill.
- Post reported no material off-balance-sheet arrangements. It disclosed $207.3 million of operating lease obligations and $2,611.5 million of purchase obligations at year-end. The company also remained guarantor for certain former Bob Evans restaurant leases; the restaurant business was meeting its obligations at the reporting date.
- The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. The auditor identified critical audit matters involving the 8th Avenue valuation, Refrigerated Retail goodwill impairment and Bob Evans trademark valuation; these matters were not separate audit opinions.
Important facts for investors to verify
- Separate the effect of 8th Avenue’s deconsolidation and the Bob Evans acquisition from underlying sales, margins and cash-flow trends.
- Reconcile reported operating profit and net earnings to the effects of the 8th Avenue gain, impairments, legal costs and large swap mark-to-market losses.
- Review debt and liquidity after the October 2019 BellRing IPO and financing transactions; FY2019 year-end debt figures predate those transactions.
- Track customer concentration, especially Walmart and the high customer concentration in BellRing Brands and Weetabix.
- Assess whether the cheese business and Bob Evans trademark assumptions support carrying values, and monitor any further impairment indicators.
- Monitor the remaining egg-product antitrust litigation, commodity and freight costs, pension assumptions and the company’s ability to generate cash while servicing its debt.