Business context and reporting period
Post Holdings, Inc. manufactures and markets branded ready-to-eat cereals in the United States and Canada. This Form 10-Q covers the three months ended December 31, 2011, compared with the same quarter of 2010. The financial statements are historical combined results of the cereal business while it was part of Ralcorp; Post completed its spin-off on February 3, 2012, and began trading independently on February 6.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $219.3 million | $223.7 million |
| Gross profit / margin | $98.0 million / 44.7% | $108.0 million / 48.3% |
| Operating profit / margin | $31.3 million / 14.3% | $49.0 million / 21.9% |
| Net earnings | $12.8 million | $23.4 million |
| Diluted EPS | $0.37 | $0.68 |
| Operating cash flow | $26.2 million | $36.5 million |
| Capital expenditures | $9.1 million | $3.3 million |
At December 31, 2011, cash was $12.9 million, current assets were $151.0 million, and current liabilities were $148.7 million. The pre-spin balance sheet showed $784.5 million of intercompany debt, including $68.0 million current; these obligations were settled in connection with the separation. After the spin-off, Post incurred approximately $950 million of new debt: $775 million of 7.375% senior notes due 2022 and a $175 million term loan. It also had a $175 million revolving facility that was unfunded at separation.
Material changes versus the prior comparable period
- Sales declined $4.4 million, or 2%, primarily as overall volumes fell 3%, partly offset by higher net selling prices. Great Grains volume rose 13% following a national campaign; Honey Bunches of Oats and Pebbles volumes each fell 4%.
- Gross margin fell 3.6 percentage points. Management attributed pressure to $5.0 million of higher raw-material costs, mainly wheat, nuts, and corn, and $3.5 million of unfavorable manufacturing costs related to lower production and fixed-cost absorption.
- SG&A increased to 29.0% of sales from 24.5%. It included $2.7 million of separation costs; excluding those costs, SG&A was 27.7% of sales, reflecting increased brand advertising and promotion.
- Net earnings declined $10.6 million. Operating profit decreased $17.7 million, while interest expense was nearly unchanged at $13.0 million.
- Operating cash flow decreased $10.3 million, mainly due to lower operating profit, partly offset by working-capital changes. Capital spending rose, primarily for a corporate office building and related furnishings.
Outlook, risks, and unusual items
- No quantified earnings or sales guidance is provided. Management expected positive operating cash flow and stated that cash flows and credit facilities should meet working-capital, capital expenditure, pension, and other financing needs for the next 12 months and foreseeable future; this depends on operating performance and other business conditions.
- Management identified stand-alone execution, high leverage and debt covenants, commodity and energy costs, cereal competition and demand, customer concentration, supply-chain disruptions, pension costs, and the ability to service debt as key risks. One customer represented approximately 21% of sales in both periods.
- The credit facility is secured by substantially all assets of the company and its domestic subsidiary, includes leverage and interest-coverage covenants, and requires scheduled term-loan amortization. The maximum leverage covenant steps down over time.
- Post reported $2.1 million of losses from its participation in Ralcorp’s commodity-hedging program in the quarter, recorded in cost of goods sold. The related derivatives were not recognized as Post’s own balance-sheet instruments.
- Post disclosed ordinary-course legal proceedings and regulatory matters; management did not expect their ultimate impact to be material. The company also undertook tax-related indemnification obligations to Ralcorp under specified circumstances.
- Pre-spin results include Ralcorp corporate-cost allocations and centralized services; management cautioned that these may not reflect costs as an independent company. The post-spin debt structure and operating costs therefore differ from those in the quarter reported.
Important facts for investors to verify
- How stand-alone selling, administrative, and transition-service costs compare with the historical Ralcorp allocations.
- Post-spin leverage, interest expense, covenant headroom, and the repayment schedule for the term loan and notes.
- Whether cereal volumes, pricing, and gross margins recover as commodity costs and advertising levels change.
- The sustainability of operating cash flow, working-capital requirements, and capital spending following the separation.
- Exposure to the major customer and the outcomes of tax, legal, pension, and other contingencies.