Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2012. Post manufactures and sells branded ready-to-eat cereal in the U.S. and Canada. It separated from Ralcorp in a tax-free spin-off on February 3, 2012 and began trading independently on February 6. Accordingly, pre-spin-off results reflect the Branded Cereal Business within Ralcorp and may not be comparable to Post’s future stand-alone results. The report was signed September 14, 2012; the cover indicates the company had not filed all required reports during the preceding 12 months.
Financial results
| Metric | Three months ended March 31, 2012 | Prior year | Six months ended March 31, 2012 | Prior year |
|---|---|---|---|---|
| Net sales | $250.5 million | $259.0 million | $469.8 million | $482.7 million |
| Gross profit / margin | $111.0 million / 44.3% | $125.1 million / 48.3% | $209.0 million / 44.5% | $234.9 million / 48.7% |
| Operating profit / margin | $33.2 million / 13.3% | $58.5 million / 22.6% | $64.5 million / 13.7% | $109.3 million / 22.6% |
| Net earnings | $10.5 million | $29.1 million | $23.3 million | $53.7 million |
| Diluted EPS | $0.30 | $0.85 | $0.68 | $1.56 |
For the six-month period, operating cash flow was $67.1 million, capital expenditures were $15.8 million, and cash increased by $62.4 million to $64.1 million. At March 31, cash was $64.1 million, current assets were $210.6 million, and current liabilities were $105.3 million.
Debt totaled $950.0 million before current maturities: $775.0 million of 7.375% senior notes due 2022 and a $175.0 million term loan due 2017. The balance sheet reports $939.1 million of long-term debt and $10.9 million current debt. The $175.0 million revolver was undrawn, with $174.5 million available after a letter of credit. The term loan’s weighted-average interest rate was 2.394% at quarter-end. The notes are unsecured; the credit facility is secured by substantially all assets and includes leverage and interest-coverage covenants.
Changes and drivers
- Quarterly sales fell 3%, with volumes down 8%; six-month sales fell 3%, with volumes down 6%. Higher net selling prices partly offset volume declines. Management attributed weaker volume to cereal-category softness, market-share losses, reduced trade spending and discounts, and shifts toward value and private-label products. Great Grains was an exception, with volume up 14% in the quarter and 13% for six months after a brand relaunch campaign.
- Margins contracted: six-month gross margin declined 4.2 percentage points. Management cited higher raw-material costs ($12.0 million) and unfavorable manufacturing costs ($12.3 million), including poorer fixed-cost absorption from lower production.
- SG&A increased as a share of sales, reflecting separation and stand-alone transition costs of $8.0 million for six months and higher advertising spending of $11.1 million. Excluding separation costs, SG&A was still higher as a percentage of sales, primarily due to advertising.
- Six-month net earnings declined $30.4 million. Higher interest expense, reflecting new stand-alone debt, and a higher effective tax rate also weighed on results. The six-month effective tax rate was 38.7%, versus 32.1%; excluding specified spin-off-related tax items, management estimated approximately 32.4%.
Outlook, liquidity and risks
Management expected positive operating cash flow and stated that cash flows and available credit were sufficient for working capital, capital spending, pension contributions and other requirements over the next 12 months and foreseeable future. No numerical earnings or revenue guidance is provided. Management noted that cash generation depends on economic conditions, competition and other risks, and that additional financing, if needed, might not be available on favorable terms.
Following restatements of 2011 annual and December 2011 interim financial information, Post obtained credit-agreement waivers in May and June 2012. The waivers were conditional on delivering restated statements by September 15, 2012, and required preliminary information for later 2012 quarters. Failure to satisfy the conditions could end the waivers. The credit facility has a maximum leverage covenant that steps down from 5.50x and a minimum interest-coverage covenant that tightens over time.
The filing describes a prior material weakness involving deferred-tax inputs to goodwill impairment testing, which contributed to a $63 million understatement of a 2011 impairment charge and overstatement of goodwill. Management said the weakness did not continue to affect disclosure controls after the spin-off and reported disclosure controls effective as of March 31, 2012; it also cautioned that future deficiencies could arise. The company identified risks from restatements, stand-alone transition, high leverage, commodity and energy costs, competition, customer concentration, goodwill and intangible impairment, litigation, pension costs, and potential tax indemnification obligations to Ralcorp. Management said pending legal matters were not expected to be material based on information then available.
Other notable items: separation-related costs included $5.3 million in the quarter and $8.0 million for six months; a $7.2 million after-tax pension separation adjustment reduced comprehensive income. Post had no open derivative positions at March 31. One customer represented $52.0 million of quarterly sales and $99.8 million of six-month sales.
Investor verification points
- Confirm the status and scope of the restatements, the related material weakness remediation, and whether the required lender deliverables were made by the waiver deadlines.
- Track volume, market share, pricing and advertising effectiveness, especially whether Great Grains gains offset broader brand and category declines.
- Assess debt-service capacity, covenant headroom, floating-rate exposure and the availability of the revolver as operating results and margins change.
- Monitor raw-material costs, manufacturing utilization, separation and transition expenses, and the potential for further goodwill or intangible impairment.
- Review customer concentration, Ralcorp transition-service arrangements and tax indemnification provisions; the filing does not provide a numerical earnings outlook.