Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2013. Financial statements are unaudited. Post manufactures and sells branded ready-to-eat cereals and related products, primarily in the United States and Canada. The prior-year comparison includes pre-spin-off periods when Post was part of Ralcorp, so those results may not reflect the costs of operating as a standalone company.
Financial performance
| Metric | Three months 2013 | Three months 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $248.2 million | $250.5 million | $485.1 million | $469.8 million |
| Gross profit | $102.5 million | $111.0 million | $208.2 million | $209.0 million |
| Operating profit | $28.9 million | $33.2 million | $59.2 million | $64.5 million |
| Net earnings | $5.1 million | $10.5 million | $12.7 million | $23.3 million |
| Net earnings available to common shareholders | $4.3 million | $10.5 million | $11.9 million | $23.3 million |
| Diluted EPS | $0.13 | $0.30 | $0.36 | $0.68 |
Second-quarter gross margin fell to 41.3% from 44.3%; operating margin declined to 11.6% from 13.3%. For the six months, gross margin was 42.9% versus 44.5%, and operating margin was 12.2% versus 13.7%. Quarterly sales decreased 0.9%, despite 3% volume growth, as average net selling prices declined 4%. Six-month sales increased 3.3%, with 5% volume growth offset in part by lower average prices.
Quarterly gross-margin pressure reflected $10.6 million of unfavorable net pricing and $0.9 million of higher raw-material costs, partly offset by $1.3 million of favorable manufacturing costs. For the six months, higher raw-material costs of $6.8 million and unfavorable pricing were partly offset by $5.3 million of favorable manufacturing costs. Lower advertising and promotion expense helped offset higher standalone-company costs in SG&A.
Cash, debt and liquidity
- Cash and equivalents were $365.4 million at March 31, 2013, up from $58.2 million at September 30, 2012. Current assets were $557.6 million and current liabilities were $110.8 million.
- Six-month operating cash flow was $18.6 million, down from revised comparative cash flow of $77.1 million. Management attributed the decline primarily to unfavorable working-capital movements, including higher inventory, and cash interest payments of $39.8 million in 2013.
- Investing cash outflow was $20.2 million, including $11.0 million of capital expenditures and the $9.2 million Attune acquisition. Financing cash inflow was $309.1 million; cash increased $307.2 million over the period.
- Long-term debt was $1,039.5 million at March 31, versus total debt of $945.6 million at September 30, 2012. The company issued $250 million of additional 7.375% senior notes and repaid the remaining $170.6 million term-loan principal. The senior notes mature in 2022.
- The $175 million revolving facility had $173.9 million of available capacity after a $1.1 million letter of credit. Post reported compliance with its credit-facility financial covenants at quarter-end.
Material developments, outlook and risks
- In February 2013, Post issued 2.4 million shares of 3.75% Series B cumulative perpetual convertible preferred stock, receiving $234.1 million net. Preferred dividends reduced earnings available to common shareholders by $0.8 million for the quarter and six-month period.
- Post acquired substantially all Attune Foods assets for approximately $9.2 million in December 2012, adding Attune, Uncle Sam and Erewhon brands.
- After quarter-end, Post announced plans to close its Modesto, California plant, with closure and production transfers expected by September 2014. Management estimated approximately $29.8 million of capital expenditures and $14.0 million of annual pretax cash manufacturing-cost savings after implementation.
- On May 9, 2013, Post announced a definitive agreement to acquire Hearthside Food Solutions’ branded and private-label cereal, granola and snacks business for $158.0 million, subject to a working-capital adjustment and closing conditions. The filing did not provide a formal earnings or sales forecast.
- Management said cash on hand, operating cash flow and credit facilities should be sufficient for foreseeable needs, while noting dependence on operating conditions and the possibility of needing additional financing. Risks include high leverage, covenant restrictions, commodity and energy costs, competition, customer concentration, standalone-system migration, acquisition integration and potential impairment of trademarks. One customer represented about 20% of quarterly sales and 22% of six-month sales.
- The filing reported no material change to previously disclosed risk factors and no material adverse expected outcome from ordinary-course legal proceedings. Management identified two trademarks whose estimated fair values had only slightly exceeded carrying values at September 30, 2012; unfavorable changes in assumptions could cause a material impairment.
- The 2012 comparative cash-flow statement was revised: six-month operating cash flow increased from $67.1 million to $77.1 million, and financing cash flow decreased from $10.7 million to $0.7 million. The company said the errors were not material and did not affect earnings or comprehensive income.
Important facts for investors to verify
- Whether volume gains can be sustained while pricing, promotional spending and product mix recover sufficiently to improve margins.
- How working capital and operating cash flow develop, particularly as inventory levels normalize and the company funds interest, preferred dividends and investment needs.
- Debt capacity, covenant headroom and the effect of financing the proposed Hearthside acquisition on leverage and liquidity.
- Whether the Modesto transition achieves the estimated savings, within the stated capital cost and timetable.
- Standalone operating costs, IT-system migration progress and the potential exposure associated with the concentrated major customer and trademark valuations.