Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended March 31, 2018. Post is a consumer packaged goods company with five reportable segments: Post Consumer Brands, Weetabix, Refrigerated Food, Active Nutrition and Private Brands. Bob Evans, acquired January 12, 2018, is included in Refrigerated Food. Unless stated otherwise, amounts are in millions.
Financial results and liquidity
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 | Prior comparable period |
|---|---|---|---|
| Net sales | $1,586.1 | $3,019.2 | $1,255.4 and $2,505.2 |
| Operating profit | $164.3 | $328.8 | $137.5 and $213.7 |
| Net earnings | $91.5 | $386.4 | Net loss of $2.1 and earnings of $99.7 |
| Diluted earnings per share | $1.20 | $5.04 | Loss of $0.08 and earnings of $1.25 |
| Cash from operating activities | $263.6 for six months | Cash used of $21.7 |
- Quarterly sales rose 26% and six-month sales rose 21%; operating profit increased 19% and 54%, respectively. Reported gross profit was $475.7 for the quarter and $927.4 for six months. Gross margin was approximately 30.0% for the quarter versus 29.0% a year earlier; operating margin was approximately 10.4% versus 11.0%.
- Quarterly earnings included a $50.5 gain in other income, primarily from interest-rate swap mark-to-market adjustments. Six-month earnings also benefited from a provisional $272.4 tax benefit related to U.S. tax reform. These items make reported earnings less representative of underlying operating performance.
- Cash and cash equivalents were $309.2 at March 31, 2018, down from $1,525.9 at September 30, 2017. Six-month cash used in investing was $1,539.2, chiefly reflecting $1,454.0 of net acquisition spending. Financing activities provided $56.9.
- Debt principal outstanding was $7,459.2; balance-sheet current and long-term debt totaled $7,417.7 after debt issuance costs and other accounting adjustments. The company had $784.4 of available revolving-credit capacity, net of letters of credit. The weighted-average interest rate on total debt was 4.9% at March 31, 2018, compared with 6.0% a year earlier.
- Management said cash on hand, operating cash flow and current or possible future credit facilities should be sufficient for foreseeable requirements, while noting that cash generation depends on economic conditions, competition and other business risks.
Material changes and segment performance
- Acquisition contributions, particularly Bob Evans and the previously acquired Weetabix Group, were major drivers of sales growth. Refrigerated Food sales rose 32% in the quarter and 19% for six months; reported segment profit was $62.7 and $131.8, respectively. Excluding specified Bob Evans acquisition-related costs and other items, Bob Evans contributed $12.4 of segment profit for the quarter and six months.
- Active Nutrition sales increased 16% in the quarter and 18% for six months, led by ready-to-drink products; powder and bar volumes declined. Six-month segment profit included a $9.0 litigation-settlement accrual.
- Post Consumer Brands sales increased 7% for the quarter, including Weetabix North America, but six-month segment profit fell 6% to $161.3, reflecting pricing, freight, input and spending pressures. Weetabix reported $109.0 of quarterly sales and $15.7 of segment profit; management cited volume declines, unfavorable mix and acquisition-related depreciation and amortization.
- Private Brands sales increased 10% for the quarter and 6% for six months. Quarterly segment profit declined 6%, partly due to delayed pass-through of higher raw-material costs; six-month segment profit increased 11%.
- Post issued $1,000.0 of 5.625% senior notes due 2028, used proceeds in part to refinance $630.0 of 6.00% notes and fund Bob Evans, and repurchased $138.8 of its common stock during the six months. It also reduced the term-loan interest-rate margin by 25 basis points.
Outlook, risks and unusual items
- The filing provides no quantified earnings or sales guidance. Management expects positive operating cash flow to continue and states that it expects liquidity to meet foreseeable needs, subject to business and financing risks.
- Tax accounting under the Tax Cuts and Jobs Act remained provisional. The company expected to finalize related adjustments by September 30, 2018; final effects could differ materially from estimates.
- Bob Evans appraisal claims covered approximately 3.3 million shares. Post accrued $257.4, including interest, but states the final amount could differ materially and affect results or cash flows. Post also guaranteed leases for 143 former Bob Evans restaurant properties; current annual rent was $13.3, with terms extending approximately 18 years, although the restaurant business was meeting its obligations.
- Egg-industry antitrust claims remained pending in part; management said the potential loss could not be estimated. Other risks identified include high leverage and debt service, acquisition integration and synergies, raw-material and freight costs, consumer demand, litigation, foreign exchange, goodwill impairment, and operational or supply-chain disruption.
- Post announced a plan to close its Clinton, Massachusetts cereal facility by September 2019, with total expected restructuring charges of $11.7, of which $1.8 had been incurred by March 31, 2018. The company also reorganized its reportable segments and reclassified prior-period segment results.
- Management reported effective disclosure controls. Internal controls were materially affected by transition to a new consolidation system; controls over that system were in place and believed to be operating effectively, while integration-related control work continued.
Important facts for investors to verify
- How much of sales and profit growth persists after separating acquisitions, foreign-exchange effects and one-time items.
- The final tax-reform accounting and its effect on the unusually large six-month tax benefit and earnings.
- Bob Evans integration performance, expected synergies, final purchase accounting, appraisal-claim resolution and lease-guarantee exposure.
- Underlying segment trends, especially Weetabix and cereal volumes, Active Nutrition powder and bar declines, and input, freight and pricing pressures.
- Debt levels, interest costs, refinancing capacity and cash generation following acquisition spending and share repurchases.
- Outcomes of the remaining egg antitrust litigation and the Active Nutrition litigation-settlement matter.