Post Holdings, Inc. — Q3 FY2016 Form 10-Q
Period: Fiscal quarter and nine months ended June 30, 2016. Dollar amounts are in millions unless otherwise noted. Post operates four segments: Post Consumer Brands, Michael Foods Group, Active Nutrition and Private Brands.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $1,246.1 | $1,211.8 | $3,766.0 | $3,338.4 |
| Gross profit | $398.2 | $316.5 | $1,170.0 | $841.1 |
| Operating profit | $142.0 | $81.3 | $437.4 | $171.9 |
| Net earnings (loss) | $3.3 | $24.0 | $33.7 | $(42.8) |
| Net earnings (loss) available to common shareholders | — | $19.8 | $12.0 | $(55.5) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $367.5 | $261.7 |
- Q3 sales rose 3%; nine-month sales rose 13%. Operating profit increased 75% and 154%, respectively. Gross margin was approximately 32.0% in Q3 versus 26.1%; nine-month gross margin was 31.1% versus 25.2%.
- Q3 net earnings available to common shareholders were zero after $3.3 of preferred dividends; reported basic and diluted EPS were shown as a dash. Nine-month EPS was $0.17, compared with a loss of $1.02.
- Net interest expense increased to $77.3 in Q3 and $232.3 for nine months, up 19% and 26%. Other expense included non-cash interest-rate-swap mark-to-market losses of $62.6 and $169.4, respectively.
- Nine-month operating cash flow improved by $105.8. Cash used in investing was $150.9, mainly reflecting $94.4 of acquisitions and $81.1 of capital spending. Cash and cash equivalents were $1,033.2 at June 30, up from $841.4 at September 30, 2015.
Balance sheet, debt and liquidity
- At June 30, 2016, total assets were $9,315.7, total liabilities $6,275.5 and shareholders’ equity $3,040.2. Current assets were $1,963.1 versus current liabilities of $613.9.
- Principal debt was $4,470.9 (carrying value, including current portion, was $4,508.9); cash less principal debt was approximately $3,437.7. The revolving facility had $388.1 available after letters of credit.
- Management reported compliance with credit-facility covenants and said it expected cash on hand, operating cash flow and credit facilities to meet requirements for the foreseeable future. It cautioned that cash generation depends on economic conditions, competition and other risks.
- After quarter-end, on August 3, Post issued $1,750.0 of 5.0% senior notes due 2026. Most proceeds funded a tender for approximately $1,242.0 of 7.375% notes due 2022, repayment of the $374.4 term loan and fees.
Changes, segment results and unusual items
- Post Consumer Brands sales grew 22% in Q3, primarily from the MOM Brands acquisition; segment profit rose 46% to $75.2. Management cited combination synergies, while legacy Post Foods sales declined 2% in the quarter.
- Michael Foods Group sales fell 8% to $518.0, reflecting lower egg-product sales, the Canadian egg-business divestiture and pass-through of lower input costs. Segment profit increased 36% to $65.6, with improvement across businesses; it included a $10.0 provision for a potential legal settlement.
- Active Nutrition sales were up 1% and segment profit rose to $17.7 from $7.9. Premier Protein growth and lower costs were partly offset by declines in Dymatize and PowerBar. Private Brands sales rose 1%, but segment profit fell 14% to $9.0.
- Willamette Egg Farms was acquired in October 2015; Post sold certain Canadian egg-business assets in March 2016. The filing attributes part of sales and profit growth to acquisitions and notes that the prior-year comparison includes different acquisition timing. Results also reflect the ongoing effects of the 2015 avian-influenza outbreak on egg supply and demand.
- Nine-month results included a $36.1 pre-tax gain in other comprehensive income from an amendment to a postretirement plan, not net earnings. Restructuring and held-for-sale losses were lower than in the prior-year period.
- No numerical earnings or sales guidance was provided. Management described expected liquidity as adequate for the foreseeable future. Risks include high leverage, acquisition integration and synergy delivery, commodity and input-cost volatility, consumer demand, litigation, supply disruption and foreign exchange.
- Michael Foods faces egg-industry antitrust class and opt-out litigation; the company said it could not estimate a loss. Management stated other pending legal matters were not expected to be material. Disclosure controls were judged effective; Post reported converting the legacy Post Foods ERP system to the MOM Brands system during the quarter.
Important facts for investors to verify
- Whether the August 3 refinancing reduces ongoing interest expense as expected, considering the new notes’ cost, tender results and fees.
- How much reported operating-profit growth is sustainable after acquisition contributions, cost savings and unusual items; monitor legacy brand volumes and segment margins.
- Whether Michael Foods’ egg volumes and economics continue to recover, and the eventual outcome and financial exposure from the potential settlement provision and antitrust litigation.
- Whether operating cash flow remains strong as inventory rises with egg supply recovery, and whether covenant headroom and liquidity remain adequate given leverage.
- Whether MOM Brands integration, synergies and ERP conversion proceed without material disruption.