Post Holdings, Inc. — Q1 FY2019 Form 10-Q
Reporting period: Three months ended December 31, 2018; comparative period is the three months ended December 31, 2017. The interim financial statements are unaudited. Post is a consumer packaged goods company with five reportable segments: Post Consumer Brands, Weetabix, Foodservice, Refrigerated Retail and Active Nutrition.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $1,411.3 million | $1,433.1 million |
| Gross profit | $426.5 million | $448.5 million |
| Operating profit | $293.9 million | $161.0 million |
| Net earnings | $125.6 million | $294.9 million |
| Net earnings available to common shareholders | $123.6 million | $291.5 million |
| Diluted EPS | $1.67 | $3.82 |
| Cash provided by operating activities | $238.7 million | $204.5 million |
| Capital expenditures | $78.8 million | $46.7 million |
Gross margin was approximately 30.2%, compared with 31.3%. Reported operating profit included a $124.7 million gain on the 8th Avenue transactions and a $0.6 million gain on sale of a warehouse. Excluding those gains and the prior-year $9.0 million legal settlement provision, management said operating profit decreased $1.4 million, or 1%.
Cash, cash equivalents and restricted cash totaled $233.5 million at December 31, 2018, including $222.9 million of cash and cash equivalents. Net cash used in financing was $1,199.6 million, mainly reflecting debt repayments and payments related to Bob Evans appraisal claims. Long-term debt was $6,336.5 million on the balance sheet; outstanding debt principal was $6,369.4 million. The $800 million revolving facility had $777.1 million of available borrowing capacity after letters of credit. The company was not required to test its secured-leverage covenant at quarter-end and said it expected to meet future financing needs from cash, operating cash flow and available credit facilities.
Material changes versus the prior period
- Sales declined $21.8 million, or 2%. The historical Private Brands business, now 8th Avenue and no longer consolidated, contributed $206.4 million of prior-year sales. Its removal was partly offset by incremental Bob Evans sales and growth in Post Consumer Brands and Foodservice.
- On October 1, 2018, Post completed the 8th Avenue transactions, received total proceeds of $875 million across the transaction structure, and retained 60.5% of its common equity. Post accounts for the retained interest under the equity method; the quarter included a $10.7 million equity-method loss, net of tax.
- Operating profit rose $132.9 million, mainly because of the 8th Avenue and warehouse gains and the prior-year legal settlement provision. Net earnings fell $169.3 million, with the comparison also affected by the prior-year $255.8 million tax benefit from the Tax Cuts and Jobs Act; the current-year effective tax rate was 24.3%.
- Post used transaction proceeds to repay $863.0 million of term-loan principal and repurchased or retired $60.0 million of senior notes principal. It also paid $257.6 million related to Bob Evans appraisal proceedings.
- Operating cash flow increased $34.2 million. Investing cash flow was $201.5 million, including $250.0 million in cash proceeds from 8th Avenue and $28.3 million from cross-currency swap settlements; capital expenditures increased, partly for a new precooked egg facility.
Segments and management commentary
| Segment | Sales | Segment profit | Segment profit margin |
|---|---|---|---|
| Post Consumer Brands | $455.3 million; up 5% | $84.0 million; up 20% | 18%, versus 16% |
| Weetabix | $100.9 million; up 1% | $18.9 million; up 13% | 19%, versus 17% |
| Foodservice | $408.1 million; up 11% | $52.7 million; up 15% | 13%, versus 12% |
| Refrigerated Retail | $261.6 million; up 85% | $30.5 million; up 31% | 12%, versus 16% |
| Active Nutrition | $185.8 million; approximately flat | $35.2 million; up 78% | 19%, versus 11% |
Management attributed Post Consumer Brands’ growth to higher volume, pricing and mix, partly offset by freight, raw-material and manufacturing costs. Weetabix profit improved despite lower volume and unfavorable foreign exchange. Foodservice and Refrigerated Retail benefited from Bob Evans, acquired in January 2018, and volume gains; segment comparisons are affected by the acquisition and reporting reorganization. Active Nutrition profit benefited from lower raw-material and advertising costs; bar sales and volume declined.
Outlook, risks and unusual items
- No numerical company guidance or specific earnings forecast is provided in the filing text. Management said it expects positive operating cash flows and believes available cash, operating cash flow and credit facilities will meet foreseeable financing needs, while noting that cash generation depends on economic conditions, competition and other business risks.
- Interest expense included $51.7 million of net swap expense, of which $51.5 million was noncash mark-to-market loss. Interest expense also benefited from reclassification of previously recorded hedge gains. The company uses derivatives to manage commodity, currency and interest-rate exposures and says it does not use them for speculation.
- Key stated risks include high leverage and debt-service capacity, freight and commodity costs, consumer demand and competition, acquisition integration, potential goodwill or intangible impairment, foreign-exchange and interest-rate movements, and legal and regulatory matters.
- Remaining litigation includes egg-products antitrust claims against subsidiary Michael Foods and Bob Evans appraisal proceedings involving approximately 2.5 million shares. The company had a $6.0 million accrual for the antitrust matter and a $13.7 million remaining accrual for appraisal-related statutory interest; further appraisal payments may be required.
- Post remains guarantor of leases for 143 former Bob Evans restaurant properties. Current annual rent is $13.5 million, with lease terms extending approximately 17 years; the restaurant business was meeting its obligations at quarter-end.
- Post expects adoption of the new lease accounting standard in fiscal 2020 to materially increase reported assets and liabilities, but said it could not yet quantify the impact.
Important facts for investors to verify
- How much of reported operating profit and EPS reflects the 8th Avenue gain, swap accounting, and other nonrecurring or noncash items.
- The valuation assumptions underlying Post’s retained 60.5% 8th Avenue equity-method investment and its future earnings contribution.
- Debt repayment capacity, variable-rate exposure, swap valuations, and the availability and terms of revolving or other financing.
- Potential additional payments or adverse outcomes in the Bob Evans appraisal proceedings and remaining egg-products antitrust litigation.
- Segment trends on a comparable basis, particularly the effects of the Bob Evans acquisition, 8th Avenue deconsolidation, segment reorganization and revenue-standard adoption.