Business context and reporting period
Post Holdings, Inc. is a consumer packaged goods company operating in cereal, refrigerated foods, active nutrition and private-label foods. This unaudited Form 10-Q covers the quarter and six months ended March 31, 2015; the fiscal second quarter ended March 31. Results are substantially affected by acquisitions, including Michael Foods, which was acquired in June 2014. Post reorganized its reportable segments effective October 1, 2014; prior-period segment figures were recast.
Key financial results
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2014 periods.
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $1,052.7 vs. $438.0 | $2,126.6 vs. $735.0 |
| Gross profit | $275.5 vs. $129.4 | $524.6 vs. $243.9 |
| Gross margin | 26.2% vs. 29.5% | 24.7% vs. 33.2% |
| Operating profit (loss) | $49.7 vs. $(0.3) | $90.6 vs. $24.9 |
| Net earnings (loss) | $30.5 vs. $(18.3) | $(66.8) vs. $(20.7) |
| Net earnings (loss) available to common shareholders | $26.3 vs. $(22.6) | $(75.3) vs. $(27.6) |
| Diluted EPS | $0.45 vs. $(0.67) | $(1.45) vs. $(0.83) |
- Reported sales increased 140% in the quarter and 189% year to date. Management attributed most of the increase to acquisitions; excluding acquisition contributions, sales grew 7% and 2%, respectively.
- Quarterly operating profit improved, but six-month net loss widened. The six-month results included $83.4 of non-cash interest-rate-swap mark-to-market losses and a $22.5 loss on assets held for sale.
- The quarterly tax benefit was $69.4 despite a pretax loss of $38.9, producing net income. Management reported effective tax rates of 178.4% for the quarter and 40.7% year to date; the benefit and rate reflect the estimated annual tax rate and related tax accounting.
- Quarterly weighted-average diluted shares rose to 67.6 million from 33.6 million, reflecting dilutive securities, including convertible preferred stock. Post also issued 7.475 million common shares in February.
Segments
- Consumer Brands: Quarterly sales were $378.5 and segment profit $46.3. Excluding acquisitions, quarterly sales rose 6%; growth in Premier Nutrition shakes and cereal performance contributed, while cereal volumes and pricing were weaker over the six-month period.
- Michael Foods Group: Quarterly sales were $550.3 and segment profit $39.8; the year-ago comparison largely predates Post’s acquisition of Michael Foods. Six-month segment profit included $5.1 of costs and lost volumes related to corrective actions following isolated 2014 product-quality issues.
- Private Label: Quarterly sales were $124.9 and segment profit $10.4. Excluding acquisitions, sales increased 21% in the quarter, helped by granola sales and demand for higher-priced tree nut butters.
Cash flow, debt and liquidity
- For the six months, operating cash flow was $158.4, compared with $18.5 in 2014; investing cash outflow was $160.6, compared with $1,050.6; and financing cash inflow was $314.3, compared with $1,463.2. The operating cash-flow improvement reflected acquired operations, working-capital changes including collection of a $55.5 tax receivable, and lower tax payments, partly offset by $76.4 of higher interest payments.
- Cash and cash equivalents were $579.0 at March 31, up from $268.4 at September 30, 2014. The company had $399.5 of revolving-credit availability at March 31, net of letters of credit.
- Outstanding debt principal was $3,797.2 at March 31, including $878.4 of variable-rate term-loan debt; the weighted-average interest rate was 6.1%. Post reported compliance with its credit-agreement financial covenants at quarter-end.
- In February, Post raised $341.4 net through a common-stock offering. After quarter-end, on May 4, it completed the $1.15 billion MOM Brands acquisition, funded with $700.0 of new term-loan proceeds, cash on hand and 2.4 million shares issued to the former owners. The March 31 cash and debt balances therefore do not reflect this transaction.
- Management said cash on hand, operating cash flow and current or potential credit facilities should meet foreseeable financing needs, while noting that cash generation depends on business conditions and that additional financing or covenant waivers may not be available on acceptable terms.
Material changes, outlook and risks
- Post completed acquisitions of PowerBar and American Blanching Company during fiscal 2015 and completed the MOM Brands acquisition on May 4, after the reporting date. The MOM Brands purchase-price allocation and pro forma results were not available because acquisition accounting was incomplete.
- Post announced closure of its Boise PowerBar plant, expected to be completed by July 2015, with production expected to move to third-party manufacturers. It recorded $3.1 of Boise severance costs in the six months. The company also recorded losses on assets held for sale related to the Modesto closure and planned sale of its Portales, New Mexico facility.
- No quantified earnings or revenue guidance is provided in the filing. Management’s commentary focuses on expected financing capacity and acquisition integration; realization of MOM Brands synergies and effective integration are identified risks.
- Other risks include high leverage and debt-service requirements, commodity and energy cost volatility, competition and changing consumer demand, supply-chain and third-party manufacturing disruptions, possible impairment of goodwill or intangibles, and the U.S. avian-influenza outbreak.
- Michael Foods is involved in egg-industry antitrust litigation. Class-certification proceedings were underway; management said the potential loss could not be estimated. Management stated that other ordinary-course legal matters were not expected to be material.
Important facts for investors to verify
- How much of reported sales and segment growth reflects acquisitions versus comparable underlying performance, and whether acquired businesses improve profitability.
- The cash, debt and share-count effects of the May 4 MOM Brands transaction, together with progress on integration, synergies and the purchase-price allocation.
- The drivers and potential persistence of the swap mark-to-market losses, tax benefits, elevated interest expense and other unusual items.
- Whether planned facility closures, asset sales and co-manufacturing transitions proceed as expected, and their eventual costs and savings.
- Developments in the Michael Foods antitrust litigation, avian influenza exposure and other identified operating risks.