Business context and reporting period
Post Holdings, Inc. manufactures and sells branded and private-label ready-to-eat cereals and snacks, primarily in the United States and Canada. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2013. The company reported Post Foods and Attune Foods segments; Attune Foods combines the Attune and Hearthside businesses acquired during fiscal 2013.
Comparisons with 2012 require caution: Post separated from Ralcorp in February 2012, and pre-separation results include allocated Ralcorp costs and may not reflect standalone operations. The 2012 comparative cash flow statement was revised for errors related to the separation; the filing says the revision increased nine-month operating cash flow and decreased financing cash flow by $10.0 million, without affecting reported earnings.
Financial results and liquidity
Amounts are in millions except per-share data. Margins are calculated from reported figures.
| Metric | Three months ended June 30, 2013 | 2012 | Nine months ended June 30, 2013 | 2012 |
|---|---|---|---|---|
| Net sales | $257.3 | $241.9 | $742.4 | $711.7 |
| Gross profit / margin | $104.2 / 40.5% | $109.8 / 45.4% | $312.4 / 42.1% | $318.8 / 44.8% |
| Operating profit / margin | $24.2 / 9.4% | $41.5 / 17.2% | $83.4 / 11.2% | $106.0 / 14.9% |
| Net earnings | $3.4 | $15.8 | $16.1 | $39.1 |
| Earnings available to common stockholders | $1.1 | $15.8 | $13.0 | $39.1 |
| Diluted EPS | $0.03 | $0.46 | $0.40 | $1.13 |
| Interest expense | $19.2 | $16.1 | $60.0 | $44.2 |
Nine-month operating cash flow was $66.2, versus $105.3 in 2012; investing used $187.0, including $169.2 for acquisitions and $17.8 for capital expenditures. Financing provided $306.8, including $250.0 from senior notes and $234.0 net proceeds from preferred stock, partly offset by $170.6 of debt repayment. Cash increased $185.4 to $243.6.
At June 30, cash was $243.6, current assets were $431.1, and current liabilities were $118.3. Long-term debt was $1,039.2, including a $14.2 unamortized premium; the notes’ principal was $1,025.0 and carried a 7.375% fixed rate, due in 2022. Debt less cash was approximately $795.6. The company had no term-loan or revolver borrowings at quarter-end, and reported compliance with credit-facility financial covenants. It subsequently terminated the revolving facility on July 10.
Material changes and management commentary
- Quarterly sales rose $15.4, or about 6.4%; nine-month sales rose $30.7, or about 4.3%. Acquisitions contributed $10.7 and $13.5, respectively. Post Foods’ higher volumes were offset by lower average selling prices, product mix shifts toward lower-margin products, and higher trade and promotional spending.
- Operating profit fell $17.3 for the quarter and $22.6 for the nine months. Management cited lower-margin mix, increased corporate costs to operate independently of Ralcorp, and Modesto plant closure costs. The quarter included $4.8 of accelerated depreciation and $3.0 of restructuring expense.
- Post completed the $160.0 Hearthside assets acquisition on May 28, 2013; it had acquired Attune for $9.2 in December 2012. Attune Foods generated quarterly sales of $10.8 and segment profit of $0.2; its nine-month segment loss was $0.4. Acquisition-related inventory valuation adjustments reduced segment results.
- Management expects the Modesto, California plant transfer and closure to be completed by September 2014. It estimates approximately $29.8 of related capital expenditures and approximately $14.0 in annual pretax cash manufacturing-cost savings after transition and startup.
- Preferred stock issued in February raised $234.0 net. It carries a cumulative 3.75% dividend and is convertible at an initial $47.19 common-share price. A quarterly preferred dividend was declared after quarter-end.
Outlook, risks and unusual items
No specific revenue or earnings guidance is provided. Management said cash on hand and expected operating cash flows were expected to cover working capital, capital expenditures, pension contributions and other requirements for the foreseeable future, while noting that financing needs and cash generation depend on business conditions. The company’s forward-looking risks include leverage and debt covenants, commodity and energy costs, competition and consumer demand, customer concentration, acquisition integration, the Modesto closure, standalone-system implementation, possible goodwill or trademark impairment, product liability, supply-chain disruptions, and foreign-exchange and pension risks.
On July 18, 2013, Post issued an additional $350.0 principal amount of 7.375% senior notes for $370.1 before expenses. On August 2, it announced a definitive agreement to acquire Premier Nutrition Corporation for $180.0, subject to adjustments and customary closing conditions; completion was anticipated by September 2013. These were subsequent events, not quarter-end transactions. One customer represented approximately 20% of quarterly sales and 21% of nine-month sales. Management stated that pending legal proceedings were not expected to have a material adverse effect, based on information then available.
Investor verification points
- Verify whether lower pricing, product mix and promotional spending continue to pressure margins, and whether volume growth translates into improved profitability.
- Track the Modesto closure schedule, transition spending, estimated $14.0 annual savings and associated execution risks.
- Assess post-quarter-end financing and acquisition effects, including the additional notes, revolver termination and proposed Premier Nutrition purchase.
- Review cash conversion and working-capital trends; nine-month operating cash flow declined despite higher sales.
- Monitor customer concentration, debt-service capacity, and the valuation assumptions for goodwill and trademarks.
- Consider the limited comparability of 2012 standalone results and the disclosed revision to comparative cash flows.