Post Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. This is an annual report; fourth-quarter figures are also summarized below. Unless stated otherwise, dollar amounts are in millions.
Business context and results
Post is a consumer packaged goods holding company with five reporting segments: Post Consumer Brands, Michael Foods Group, Active Nutrition, Private Brands and Weetabix. Fiscal 2017 included Weetabix, acquired July 3, 2017, and National Pasteurized Eggs, acquired October 3, 2016. The company also announced a proposed Bob Evans acquisition in September 2017.
| Consolidated metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $5,225.8 | $5,026.8 |
| Gross profit / gross margin | $1,574.1 / 30.1% | $1,547.4 / 30.8% |
| Operating profit / operating margin | $520.3 / 10.0% | $545.7 / 10.9% |
| Net earnings (loss) | $48.3 | $(3.3) |
| Net earnings (loss) available to common shareholders | $34.8 | $(28.4) |
| Diluted EPS | $0.50 | $(0.41) |
| Cash from operating activities | $386.7 | $502.4 |
| Capital expenditures | $190.4 | $121.5 |
Fourth-quarter FY2017 net sales were $1,448.5, gross profit was $437.1, net earnings were $14.2, and diluted EPS was $0.16. The prior-year fourth quarter recorded net sales of $1,260.8, a net loss of $37.0, and diluted loss per share of $0.58.
Financial position and liquidity
- Cash and cash equivalents were $1,525.9 at September 30, 2017, up from $1,143.6 a year earlier. Working capital excluding cash, restricted cash and current debt was $403.5, compared with $303.2.
- Total debt principal was $7,212.2, versus $4,600.3 at September 30, 2016; debt carrying value on the balance sheet was $7,171.2, including related accounting adjustments. The weighted-average interest rate on outstanding debt was 4.9%, down from 6.3%.
- The revolving facility was $800.0, with $790.0 available after letters of credit. The company was not required to test its secured-leverage covenant at year-end and reported its interest-coverage ratio above the threshold for additional unsecured debt.
- Cash used in investing activities was $2,090.8, primarily reflecting $1,915.2 of net cash paid for acquisitions. Financing provided $2,053.1, including $4,700.0 of new debt proceeds. Cash increased by $382.3 over the year.
Changes versus the prior year
- Sales rose 4%, primarily from acquisitions and growth in Premier Protein, selected cereal brands, potatoes and peanut butter. This was partly offset by declines in several cereal brands, eggs, cheese, pasta and other products.
- Operating profit fell 5%. Excluding the Dymatize goodwill impairment, egg-antitrust settlement charges and foreign-currency gains cited by management, operating profit increased $17.1, or 3%.
- Segment performance was mixed: Post Consumer Brands profit rose 19% to $359.0; Michael Foods Group profit fell 52% to $133.1; Active Nutrition profit more than doubled to $96.4; and Private Brands profit rose 13% to $31.5. Weetabix contributed $112.4 in sales and $14.5 in segment profit from its acquisition date.
- Operating cash flow declined $115.7, largely due to $103.0 of legal settlement payments, higher advertising and incentive payments, and $24.0 of additional interest payments; lower income-tax payments partly offset the decline.
Outlook, risks and unusual items
- Management stated that cash on hand, operating cash flow and available credit facilities should meet foreseeable operating, investment and financing needs, while noting that future cash generation depends on economic conditions, competition and other risks. The filing does not provide a clear numerical operating forecast for FY2018.
- The Bob Evans deal was expected to close in the second quarter of FY2018, subject to shareholder, regulatory and other closing conditions. The proposed price was $77 per share; the company expected to use cash and revolving-facility borrowings. A $50.0 reverse termination fee could apply in specified circumstances.
- Fiscal 2017 included a $222.9 loss on extinguishment of debt, chiefly premiums and write-offs from refinancing higher-coupon notes; a $26.5 non-cash Dymatize goodwill impairment; and $74.5 of Michael Foods egg-antitrust settlement expense. Derivative mark-to-market gains contributed to reported other income.
- Michael Foods paid settlements with direct-purchaser and opt-out plaintiffs in the egg-antitrust litigation. The $75.0 direct-purchaser settlement remained subject to court approval; appeals and other claims remained unresolved, and potential additional loss could not be estimated.
- Key risks include substantial leverage and debt-service needs, integration and synergy execution for Weetabix and the proposed Bob Evans deal, commodity and energy volatility, competitive and consumer shifts, concentrated customers, food-safety and regulatory exposure, foreign-exchange movements, and possible goodwill or brand impairment. Weetabix was excluded from the FY2017 internal-control assessment following its acquisition; management and the auditor reported effective controls for the assessed entity population.
Important facts for investors to verify
- Reconcile debt principal, balance-sheet carrying value, maturities, interest-rate exposure and remaining borrowing capacity, particularly after the planned Bob Evans financing.
- Track Bob Evans closing conditions, final financing, integration plans and realized synergies, as well as the Weetabix integration and final purchase-price allocation.
- Monitor Michael Foods’ remaining antitrust appeals and exposure, including approval and payment status of the direct-purchaser settlement.
- Assess whether growth and margins in Active Nutrition and cereal businesses can offset weakness in Michael Foods, and whether Dymatize or the Weetabix and Honey Bunches of Oats valuations face further impairment risk.
- Compare future operating cash flow with debt service, capital spending, pension contributions and acquisition-related spending; fiscal 2017 operating cash flow decreased despite higher earnings.