Post Holdings, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
Post manufactures and markets ready-to-eat cereals, snacks and active nutrition products, primarily in the U.S. and Canada. Its three reportable segments were Post Foods, Attune Foods and Active Nutrition. Post Foods remained the core business; acquisitions added natural and organic cereal and snack brands and Premier Protein and Joint Juice products. Post reported a 10.4% U.S. ready-to-eat cereal retail dollar share for the 52 weeks ended September 28, 2013.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $1,034.1 million | $958.9 million |
| Gross profit / margin | $424.9 million / 41.1% | $428.9 million / 44.7% |
| Operating profit / margin | $107.8 million / 10.4% | $139.1 million / 14.5% |
| Net earnings | $15.2 million | $49.9 million |
| Net earnings available to common stockholders | $9.8 million | $49.9 million |
| Diluted EPS | $0.30 | $1.45 |
| Cash from operating activities | $119.2 million | $144.0 million |
| Capital expenditures | $32.8 million | $30.9 million |
Sales rose about 8%; excluding acquisitions, sales increased 2%. FY2013 acquired-business sales were $37.8 million for Attune Foods (including Hearthside assets) and $13.9 million for Active Nutrition. Post Foods sales grew 2%, with volume up 5% and average net selling prices down 2%; segment profit was $168.1 million versus $165.9 million. Attune Foods reported $37.8 million sales and $2.5 million segment profit; Active Nutrition reported $13.9 million sales and $1.0 million segment profit.
At September 30, 2013, cash and cash equivalents were $402.0 million and restricted cash was $38.1 million; current assets were $668.1 million and current liabilities $146.0 million. Working capital excluding cash and restricted cash was $82.0 million. Debt principal was $1,375.0 million; its $1,408.6 million balance-sheet carrying amount included an unamortized premium. The company also had $99.7 million of disclosed benefit obligations. Management said cash on hand, operating cash flow and capital-market access should meet foreseeable requirements, while noting that cash generation depends on economic, competitive and other risks.
Fourth-quarter FY2013 sales were $291.7 million and gross profit was $112.5 million. Net loss was $0.9 million; net loss available to common stockholders was $3.2 million, or a diluted loss per share of $0.10.
Material changes versus prior period
- Sales growth reflected acquisitions and higher volumes, partly offset by lower selling prices, product/package mix shifts and increased trade spending, including approximately $9.0 million of additional slotting fees.
- Gross margin fell 3.6 percentage points. The company cited lower net selling prices, $9.6 million of accelerated depreciation related to the Modesto closure, $5.3 million of higher raw-material costs, and the acquired businesses’ lower margins.
- Interest expense increased $25.2 million to $85.5 million, principally due to additional 7.375% senior notes and a higher-cost debt mix. Operating cash flow declined $24.8 million, including higher cash interest payments and unfavorable working-capital timing.
- Investing cash use increased to $423.8 million, including $352.9 million net cash paid for acquisitions and a $37.0 million deposit for the proposed Dakota Growers acquisition.
- Financing provided $648.8 million, including $600.0 million of additional senior-note principal and $234.0 million net proceeds from convertible preferred stock, partly offset by $170.6 million of term-loan repayment.
Outlook, risks and unusual items
- Post expected to complete the Modesto, California plant closure and production transfer by September 2014. It forecast approximately $14.0 million of annual pretax cash manufacturing savings after completion; FY2013 closure-related charges were $13.4 million, including accelerated depreciation and employee-related costs.
- The company expected the Dakota Growers Pasta acquisition to close in January 2014, subject to remaining conditions. A $37.0 million deposit was held in restricted cash; the transaction was not assured. The $525.0 million of 6.75% senior notes issued November 18, 2013, after year-end, was disclosed as a subsequent event.
- FY2013 included $8.9 million of Spin-Off-related costs, $3.8 million of restructuring expense, $2.9 million of trademark impairment and acquisition-related costs, as well as the $9.6 million accelerated depreciation charge. FY2012 included $12.5 million of Spin-Off costs. FY2011 included $566.5 million of goodwill and intangible-asset impairment.
- Key risks include substantial leverage and debt covenants, commodity and energy cost volatility, intense competition and pricing pressure, customer concentration (Walmart represented about 20% of net sales; the top ten customers about 55% of gross sales), and reliance on third-party manufacturers for Active Nutrition. Post also highlighted integration, food safety, supply-chain, pension, environmental, and stand-alone systems risks.
- Post paid a $0.6 million EPA-related penalty under a consent decree concerning the Modesto facility and anticipated indemnification for a significant portion of remediation and penalties by a prior owner. Management did not expect pending legal proceedings to be material in aggregate. The filing provided no specific consolidated earnings or revenue guidance.
- The auditor gave an unqualified opinion on the financial statements and internal control. Management considered controls effective, but the 2013-acquired businesses, representing 7% of consolidated assets and 5% of revenue, were excluded from the internal-control assessment.
Important facts for investors to verify
- Whether Modesto closure and transfer costs, timing, and projected annual savings track management’s plan.
- How acquired businesses perform relative to their acquisition costs, pro forma results and goodwill/intangible valuations.
- Debt service capacity and the impact of the November 2013 notes, preferred dividends and any future acquisitions on leverage and liquidity.
- Whether Post Shredded Wheat, Great Grains and Post brand forecasts support carrying values; the filing identifies these trademarks as particularly sensitive to assumptions.
- Status and final economics of the Dakota Growers transaction, and the concentration of Active Nutrition sales among two club customers.