Business context and reporting period
Post Holdings, Inc. is a consumer packaged goods company operating in cereal, refrigerated foods, active nutrition and private-label food categories. This unaudited Form 10-Q covers the first quarter of fiscal 2015, the three months ended December 31, 2014. Effective October 1, 2014, Post reorganized its reporting into Consumer Brands, Michael Foods Group and Private Label.
Comparisons with the prior-year quarter are substantially affected by acquisitions, particularly Michael Foods, acquired in June 2014. Fiscal 2015 sales include the acquired PowerBar and American Blanching Company (ABC) businesses; prior-year segment figures were reclassified to the new structure.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $1,073.9 million | $297.0 million |
| Gross profit / margin | $249.1 million / 23.2% | $114.5 million / 38.6% |
| Operating profit / margin | $40.9 million / 3.8% | $25.2 million / 8.5% |
| Interest expense, net | $60.1 million | $29.0 million |
| Other expense, net | $54.6 million | — |
| Net loss | $97.3 million | $2.4 million |
| Net loss available to common shareholders / diluted loss per share | $101.6 million / $2.04 | $5.0 million / $0.15 |
| Cash provided by operating activities | $57.2 million | $24.9 million |
Sales rose 262%, including $783.8 million from acquisitions; excluding acquisitions, sales declined 2%. Operating profit rose 62% as reported, but management said it fell approximately 85% excluding acquisitions. The $54.6 million other expense was a non-cash mark-to-market loss on interest-rate swaps. The effective tax rate was negative 31.8%, reflecting the estimated full-year rate and the effects of permanent differences and tax items.
Segments and notable changes
- Consumer Brands: Sales were $347.9 million and segment profit was $31.3 million, down from $47.4 million. Excluding acquisition effects, sales fell 3% and profit fell 15%. Branded ready-to-eat cereal volumes and average selling prices declined; protein shake sales increased.
- Michael Foods Group: Sales were $599.3 million and segment profit was $42.1 million. Profit included $5.1 million of accrued costs and lost volumes related to corrective actions following isolated product-quality issues in fiscal 2014.
- Private Label: Sales were $127.8 million and segment profit was $6.9 million. Excluding acquisitions, sales rose 9%, primarily on granola growth.
Reported gross and operating margins were lower than the prior-year quarter. Management cited acquired-business mix, higher amortization, lower legacy cereal sales, commodity hedge losses and other increased costs among the factors affecting results. Acquisitions contributed $37.1 million of operating profit, while Consumer Brands acquisitions contributed an operating loss of $9.0 million.
Cash, debt and liquidity
At December 31, 2014, cash and cash equivalents were $176.7 million, down from $268.4 million at September 30, 2014; restricted cash was $13.6 million. Current assets were $1,096.3 million and current liabilities $584.7 million. Long-term debt was $3,823.4 million, with a further $24.7 million current portion. Post reported $3,804.1 million of debt principal and $399.5 million available under its $400 million revolving facility after letters of credit.
Operating cash flow increased to $57.2 million, reflecting acquired operations and favorable working-capital changes, partly offset by higher interest payments. Investing activities used $136.7 million, including $184.2 million for acquisitions, partly offset by $71.2 million from reduced restricted cash. Financing activities used $11.6 million. The company reported compliance with its credit-agreement financial covenants at quarter-end.
Outlook, transactions and risks
The filing provides no quantified fiscal-year earnings or revenue guidance. Management stated it expects cash on hand, operating cash flow and credit facilities to be sufficient for foreseeable financing needs, while noting that cash generation depends on economic conditions, competition and other business risks.
Post agreed to acquire MOM Brands for $1.15 billion, comprising $1.05 billion in cash and approximately 2.45 million Post shares, subject to customary adjustments and closing conditions. The company expected closing by fiscal 2015’s fourth quarter, subject to regulatory approval. Financing plans included up to $700 million of incremental term debt, proceeds from a February 2015 share offering (net proceeds of $341.7 million) and cash on hand. The filing notes covenant limits may restrict borrowing, financing is not a condition to closing, and failure to complete the deal could expose Post to damages. Post also identified integration, antitrust clearance and acquisition execution as risks.
Other unusual items include a $7.1 million impairment charge on Modesto, California facility assets held for sale, and $3.2 million of acquired-inventory valuation adjustments. Post disclosed ongoing federal and state antitrust litigation involving Michael Foods and alleged egg-industry conduct; the company said the potential loss could not be estimated. It also cited high leverage, commodity costs, product-quality and recall exposure, acquisition integration, and potential goodwill or intangible-asset impairment as risks.
Important facts for investors to verify
- How much of sales and profit growth reflects acquisitions versus underlying performance, and whether legacy cereal declines persist.
- Progress and final terms for the MOM Brands acquisition, including antitrust approvals, financing availability and compliance with debt covenants at closing.
- Post’s ability to service substantial debt while funding acquisitions, preferred dividends and operating needs.
- The cost and business impact of Michael Foods’ product-quality corrective actions, and developments in the egg-industry antitrust litigation.
- Final purchase-price allocations and working-capital adjustments for recent acquisitions, plus the outcome and timing of the Modesto asset sale.