Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2014. The filing was signed May 9, 2014. Post is a consumer packaged goods holding company with four reportable segments: Post Foods, Attune Foods, Active Nutrition and Private Brands.
Financial performance and liquidity
| Metric | Three months ended March 31, 2014 | Six months ended March 31, 2014 |
|---|---|---|
| Net sales | $438.0 million, up 76% year over year | $735.0 million, up 52% |
| Gross profit / margin | $129.4 million / 29.5% | $243.9 million / 33.2% |
| Operating profit (loss) / margin | $(0.3) million / (0.1)% | $24.9 million / 3.4% |
| Net earnings (loss) | $(18.3) million | $(20.7) million |
| Net earnings (loss) available to common stockholders; EPS | $(22.6) million; $(0.67) per share | $(27.6) million; $(0.83) per share |
| Operating cash flow | $18.5 million for the six months, versus $18.6 million |
Revenue growth largely reflected acquired businesses; Post Foods’ sales declined 2% in the quarter and 1% in the half year. Gross margin fell from 41.3% to 29.5% for the quarter and from 42.9% to 33.2% for the half year. Management attributed the decline to lower Post Foods selling prices, accelerated plant-closure depreciation, acquisition-related inventory valuation adjustments and the lower margins of acquired businesses. Operating results also included higher acquisition-related costs, intangible amortization and foreign-currency losses.
At March 31, cash and cash equivalents were $825.9 million, current assets $1,315.6 million and current liabilities $229.7 million. Long-term debt had a carrying value of $2,302.1 million, representing $2,250.0 million principal; total liabilities were $3,092.7 million. The six-month cash increase of $423.9 million reflected $1,463.2 million of financing cash inflows, largely debt and equity issuances, offset by $1,050.6 million of investing outflows, principally acquisitions. Capital expenditures were $26.7 million.
Material changes and segment results
- Sales increased substantially with the addition of Dakota Growers, Dymatize and Golden Boy, alongside the earlier acquisitions of Premier Nutrition and Attune/Hearthside. The acquired businesses contributed partial-period results, so reported growth is not directly comparable with the prior year.
- Post Foods quarterly sales were $239.5 million versus $245.4 million; segment profit was $41.7 million versus $45.3 million. Lower average selling prices, including higher trade spending and liquidation sales, outweighed volume gains.
- For the quarter, Attune Foods reported $22.2 million sales and $1.9 million segment profit; Active Nutrition reported $70.6 million sales and $0.2 million segment profit; Private Brands reported $105.7 million sales and $0.8 million segment profit. Acquisition timing and purchase-accounting inventory adjustments affect comparability.
- Post issued $875.0 million principal of 6.75% senior notes during the six months, raised $310.2 million net from Series C convertible preferred stock and $303.5 million net from common stock. Interest expense rose 73% in the quarter and 63% in the half year.
Outlook, risks and unusual items
- No specific company-wide earnings or revenue guidance is provided. Management expects approximately $14.0 million of annual pretax cash manufacturing savings after completing the Modesto, California plant closure and production transfer, expected by September 2014.
- Post reported $11.9 million of foreign-currency losses for the quarter and $13.5 million for the half year, primarily related to hedging the Canadian-dollar Golden Boy purchase price. Acquisition-related inventory valuation adjustments were $7.3 million in both reported 2014 periods; restructuring expense and accelerated depreciation were also recorded.
- Post agreed to acquire Michael Foods for $2.45 billion, plus a $50 million payment one year after closing, subject to adjustments and closing conditions. The transaction was targeted for June 2, 2014. Financing commitments, expected to include debt and equity-linked securities, were obtained; final financing terms could differ with market conditions. The filing describes risks if financing or closing fails, and risks from integration, leverage and Michael Foods’ operations.
- Post also expected to complete its $150 million PowerBar and Musashi asset acquisition in fiscal first quarter 2015, subject to closing conditions. It purchased certain Sunland peanut-butter assets for $26 million on April 1, 2014.
- As of March 31, Post was compliant with its financial covenants, but its leverage ratio exceeded the threshold then preventing draws on the $300 million revolving facility. A May 1 amendment raised the relevant borrowing threshold condition to 7.25-to-1.00, subject to conditions, and provided for a potential $100 million additional revolver upon the Michael Foods closing. Certain covenant changes take effect only upon closing.
- Management warned that continued declines in ready-to-eat cereal category revenues, or performance below long-term estimates, could lead to further potentially material impairment charges. Other highlighted risks include high leverage, commodity and foreign-exchange volatility, acquisition integration, competition, product safety and litigation. The filing notes an antitrust lawsuit involving Michael Foods; Post’s own ordinary-course legal matters were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether Michael Foods closed as planned, the final purchase price adjustments and the actual mix, cost and availability of acquisition financing.
- Post’s pro forma leverage, liquidity, covenant headroom and interest burden after the announced acquisitions and financing.
- Whether acquired businesses deliver sustainable segment margins after purchase-accounting inventory adjustments and integration costs subside.
- Post Foods pricing, volume, trade-spending trends and cereal-category performance, including implications for potential goodwill or intangible impairment.
- Progress and realized savings from the Modesto closure, and the final outcome of acquisition working-capital settlements and contingent payments.