Post Holdings, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing is an annual report, not a standalone Q4 filing; it also presents unaudited fourth-quarter results. Amounts below are in millions of dollars except per-share data.
Business context and reporting period
Post is a consumer packaged goods holding company. In FY2014 it reported five segments: Post Foods, Michael Foods, Active Nutrition, Private Brands and Attune Foods. The year included major acquisitions, most notably Michael Foods in June, as well as Dakota Growers, Dymatize and Golden Boy. These acquisitions substantially expanded the business and make year-over-year comparisons less like-for-like.
Key financial metrics
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $2,411.1 | $1,034.1 |
| Gross profit / margin | $621.2 / 25.8% | $424.9 / 41.1% |
| Operating profit (loss) / margin | $(207.7) / (8.6)% | $107.8 / 10.4% |
| Net earnings (loss) | $(343.2) | $15.2 |
| Net earnings (loss) available to common shareholders | $(358.6) | $9.8 |
| Diluted EPS | $(9.03) | $0.30 |
| Cash from operating activities | $183.1 | $119.2 |
| Capital expenditures | $115.5 | $32.8 |
Q4 FY2014: Sales were $1,043.1, gross profit $228.7, net loss $(287.4), loss available to common shareholders $(291.7), and diluted loss per share $(5.86). The quarter included all $295.6 of the year’s goodwill and intangible-asset impairment charges.
Liquidity and debt: At September 30, 2014, cash and cash equivalents were $268.4 and restricted cash was $84.8. The $400.0 revolving facility was essentially undrawn, with $399.5 available after letters of credit. Principal debt was $3,810.9; balance-sheet debt including the current portion and unamortized premium was $3,856.1. The company reported $371.5 of working capital excluding cash, restricted cash and current debt. It was in compliance with credit-facility financial covenants, but its consolidated leverage ratio exceeded the 5.75-to-1 threshold relevant to incurring additional unsecured debt.
Segment sales and profit included Post Foods $963.1 and $186.7; Michael Foods $684.8 and $17.4; Active Nutrition $293.3 and $(1.8); Private Brands $377.4 and $14.8; and Attune Foods $93.9 and $8.7.
Material changes versus the prior comparable period
- Sales rose approximately 133%, driven principally by acquisitions. Excluding acquisitions, sales decreased 2%; Post Foods volumes increased 1.4%, but lower net selling prices and product mix weighed on its revenue.
- Gross margin declined to 25.8% from 41.1%, reflecting the addition of lower-margin acquired businesses, Post Foods pricing and mix, and $26.1 of acquired-inventory purchase-accounting adjustments.
- Operating results swung to a loss, chiefly due to $295.6 of non-cash impairment charges: $212.6 of goodwill and $83.0 of trademarks. Post Foods accounted for $181.3 of goodwill impairment; Dymatize accounted for $31.3.
- Interest expense increased to $183.7 from $85.5 as debt rose to fund acquisitions. The company also recorded $35.5 of net losses on interest-rate swaps in other expense.
- Operating cash flow increased by $63.9, supported by acquired businesses, favorable working-capital changes and lower cash taxes, partly offset by higher interest payments.
Outlook, management commentary, risks and unusual items
- Management expected approximately $14.0 of annual pre-tax cash manufacturing savings from the Modesto, California plant closure, fully phased in during FY2015. The closure was completed in September 2014; the company expected to sell the facility within a year.
- For FY2015, the company reorganized into Consumer Brands, Michael Foods and Private Label groups. It also completed the PowerBar and Musashi acquisition on October 1, 2014, and American Blanching Company on November 1, 2014; acquisition accounting was incomplete at filing.
- Management said branded ready-to-eat cereal category declines had accelerated and expected Post Foods revenue and profit growth to be challenging in the medium to long term. Post Foods FY2014 sales fell 2%, while segment profit was nearly flat.
- Significant risks include high leverage and debt-service needs, limits imposed by debt covenants, volatile agricultural and energy costs, customer concentration, competitive pricing, acquisition integration and supply-chain execution, food safety and regulatory exposure, and foreign-currency movements.
- Michael Foods was involved in longstanding federal and state egg-industry antitrust litigation seeking unspecified damages. Class-certification hearings were scheduled for December 2014 and February 2015; the company said potential loss could not be estimated.
- Other notable charges included $29.7 of acquisition-related costs, $5.3 of integration costs, $14.0 of foreign-currency losses (largely related to the Golden Boy purchase-price hedge), and $5.4 to write down Modesto assets held for sale. The effective tax rate was 19.6%; the non-deductible goodwill impairment increased tax expense.
- The financial-statement audit was unqualified. Management and the auditor excluded the FY2014 acquisitions from internal-control testing; those businesses represented 49% of consolidated revenue and 38% of consolidated assets.
Most important facts for investors to verify
- How acquired businesses perform on a full-year, comparable basis, and whether integration and expected synergies are being realized.
- Whether Post Foods can stabilize pricing, market share and profitability amid category declines, and whether further impairments are warranted.
- Debt repayment capacity, covenant headroom, interest costs and available financing flexibility given leverage above the unsecured-debt threshold.
- Progress toward the stated $14.0 annual Modesto savings and the timing and proceeds of the facility sale.
- Developments and potential financial exposure in the Michael Foods antitrust litigation, which the filing says cannot be estimated.
- Results and purchase-price accounting for the post-year-end PowerBar/Musashi and American Blanching acquisitions, along with controls integration at newly acquired businesses.