Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2014. The filing was signed August 8, 2014. Amounts are in millions except per-share data.
Business context and reporting period
Post is a consumer packaged foods company with five reportable segments: Post Foods, Attune Foods, Michael Foods, Active Nutrition and Private Brands. Results reflect substantial recent acquisitions, including Dakota Growers, Dymatize, Golden Boy and Michael Foods. Michael Foods was acquired June 2, 2014, so its reported contribution includes only the period after acquisition; comparisons with 2013 are therefore significantly affected by acquisition timing.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Nine months ended June 30, 2014 |
|---|---|---|
| Net sales | $633.0 | $1,368.0 |
| Gross profit / gross margin | $148.6 / 23.5% | $392.5 / 28.7% |
| Operating profit / operating margin | $8.0 / 1.3% | $32.9 / 2.4% |
| Net loss | $(35.1) | $(55.8) |
| Net loss available to common stockholders | $(39.3) | $(66.9) |
| Basic and diluted loss per share | $(0.92) | $(1.84) |
- Compared with the prior-year periods, sales rose 146% for the quarter and 84% for the nine months, primarily because of acquisitions. Operating profit fell from $24.2 to $8.0 for the quarter and from $83.4 to $32.9 year to date; prior-year net earnings of $3.4 and $16.1 became losses.
- Gross margin declined from 40.5% to 23.5% in the quarter and from 42.1% to 28.7% year to date. Key pressures included lower Post Foods selling prices, acquired businesses’ generally lower margins, and acquired-inventory valuation adjustments of $17.7 for the quarter and $25.0 year to date. Post Foods had 3% lower average net selling prices in both comparison periods.
- Interest expense increased to $57.0 for the quarter and $123.3 year to date, compared with $19.2 and $60.0, respectively, primarily reflecting debt issued to fund acquisitions. Other expense included $6.8 of interest-rate-swap losses. The income tax benefit was $20.7 for the quarter and $41.4 year to date.
- For the nine months, operating cash flow was $74.5, investing cash flow was $(3,587.6), and financing cash flow was $3,495.3. Acquisition-related cash outlays drove most investing use. Cash and cash equivalents were $377.3 at June 30, 2014, versus $402.0 at September 30, 2013.
- At June 30, total assets were $8,018.2 and stockholders’ equity was $2,596.2. Debt was $3,864.3 on the balance sheet, including $25.7 current and $3,838.6 long-term; the filing reports $3,817.9 of principal indebtedness. The $400.0 revolving credit facility was undrawn. The company reported compliance with its credit-agreement financial covenants.
Material changes and segment results
- Michael Foods generated $150.5 in sales and a segment loss of $12.5 in its first reported month. The loss included a $15.8 acquired-inventory valuation adjustment and reflected elevated egg and dairy input costs.
- Post Foods sales were $238.2 for the quarter, down from $246.6; segment profit was $48.2, versus $47.3. Management cited lower prices, mix shifts, liquidation sales and increased trade spending, partly offset by lower raw-material costs and reduced advertising.
- Active Nutrition sales were $86.7 and the segment recorded a $2.5 loss for the quarter. Management cited Dymatize supply-chain disruptions, related costs and elevated milk-protein costs.
- Private Brands sales were $134.2 and segment profit was $5.9. Dakota Growers faced customer insourcing of pasta production; elevated peanut costs also affected results.
- Debt, goodwill and intangible assets increased substantially with acquisitions. Goodwill was $3,097.3 and net intangible assets were $2,749.4 at June 30.
Outlook, commentary, risks and unusual items
- No specific consolidated revenue or earnings guidance is provided. Management said it expects positive operating cash flows and believes cash, operating cash generation and credit facilities should fund foreseeable needs, while noting this depends on business conditions and risks.
- Management expects approximately $14.0 in annual pretax cash manufacturing savings after the Modesto, California plant closure and production transfer, expected to be completed by September 2014. The filing reports $2.2 of remaining expected restructuring expense.
- Management warned that accelerating declines in the ready-to-eat cereal category, or performance below long-term estimates, could lead to further potentially material impairment charges in Post Foods goodwill or brands.
- Principal risks include high leverage and debt-service capacity; acquisition integration and financing; commodity and input-cost volatility; supply-chain disruption; competition and changing consumer demand; impairment; and legal and regulatory matters. The credit agreement includes leverage and interest-coverage covenants and restrictions. Although the company was covenant-compliant, its consolidated leverage ratio exceeded the stated 5.75-to-1.00 threshold for incurring additional unsecured debt, subject to the agreement’s specified amendment and exceptions.
- Michael Foods is subject to egg-industry federal and state antitrust litigation. Fact discovery had concluded; class-certification proceedings were ongoing, with hearings scheduled for December 2014 and February 2015. Management said other ordinary-course proceedings were not expected to have a material adverse effect based on information then known.
- After quarter-end, Post paid $75.0 to Nestlé and deposited $55.0 in escrow for the planned PowerBar and Musashi acquisition, then expected to close October 1, 2014. On August 7, it agreed to acquire American Blanching Company for $128.0, subject to closing conditions.
Important facts for investors to verify
- Whether acquired businesses deliver expected earnings and integration benefits, particularly given Michael Foods’ initial segment loss and Dymatize’s supply-chain issues.
- Debt principal, interest burden, covenant headroom, and availability of additional financing after the acquisition-driven increase in leverage.
- Whether lower cereal-category demand, pricing and mix trends persist, and whether they trigger further goodwill or brand impairments.
- The size and duration of acquisition accounting adjustments, integration expenses, foreign-exchange effects and elevated commodity costs.
- Progress on the Modesto closure and realization of the stated $14.0 annual savings, along with outcomes of Michael Foods antitrust litigation and the post-quarter acquisitions.