Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2012; the filing reports three- and nine-month results through that date. Although the request labels this “2012 Q1,” the filing covers Post’s fiscal third quarter and first nine months. Amounts are in millions, except per-share data.
Business context
Post manufactures and sells branded ready-to-eat cereals in the United States and Canada. It completed its tax-free spin-off from Ralcorp on February 3, 2012 and began trading independently on February 6. Accordingly, prior-period results reflect the cereal business while part of Ralcorp and may not be directly comparable with Post’s stand-alone cost structure.
Financial performance
| Metric | Three months ended June 30, 2012 | Prior year | Nine months ended June 30, 2012 | Prior year |
|---|---|---|---|---|
| Net sales | $241.9 | $247.7 | $711.7 | $730.4 |
| Gross profit | $109.8 | $113.9 | $318.8 | $348.8 |
| Operating profit | $41.5 | $16.6 | $106.0 | $125.9 |
| Net earnings | $15.8 | $1.6 | $39.1 | $55.3 |
| Diluted EPS | $0.46 | $0.05 | $1.13 | $1.61 |
| Gross margin | 45.4% | 46.0% | 44.8% | 47.8% |
| Operating margin | 17.2% | 6.7% | 14.9% | 17.2% |
Quarterly operating profit and net earnings benefited from the absence of the prior-year $32.1 intangible-asset impairment charge. Excluding that comparison effect, management said quarterly operating margin declined 2.5 percentage points. For the nine-month period, operating margin fell 2.3 percentage points despite the absence of the prior-year impairment.
Cash flow and liquidity: Nine-month operating cash flow was $95.3, down from $118.1; capital expenditures were $22.3, versus $9.8. Cash rose by $81.8 to $83.5, reflecting operating cash flow and financing activity. At June 30, total debt was $947.8: $775.0 of 7.375% senior notes due 2022 and $172.8 outstanding on the term loan. The $175.0 revolving facility had no borrowings and $174.5 available after a letter of credit. The term loan bears variable interest; its weighted-average rate was 2.25% at June 30. Current debt was $13.1.
Other metrics: Interest expense was $16.1 for the quarter and $44.2 for the nine months, higher than the respective prior periods following the spin-off financing. Effective tax rates were 37.8% for the quarter and 38.3% year to date; the nine-month rate included spin-off-related nondeductible costs and tax expense for an uncertain tax position.
Material changes and management commentary
- Sales declined 2% for the quarter and 3% for the nine months. Volumes fell 6% in both periods; higher average selling prices partly offset the volume decline. Management attributed weaker volumes to category softness, market-share losses and reduced trade spending, which contributed to movement toward value and private-label products.
- Quarterly volume fell 15% for Pebbles and 7% for Honey Bunches of Oats. For the nine months, Great Grains volume rose 9%, supported by a national relaunch campaign.
- Gross margin declined 0.6 percentage points for the quarter and 3.0 points for the nine months. Management cited higher raw-material costs and unfavorable manufacturing costs, including weaker fixed-cost absorption from lower production volumes.
- SG&A included $2.4 of transition costs in the quarter and $10.4 of separation and transition costs year to date. Nine-month SG&A also reflected increased advertising and compensation costs.
- Post incurred $950.0 of new debt in connection with the spin-off and paid Ralcorp $900.0. Ralcorp continued to provide transition services under an agreement with terms ranging from five to 24 months.
Outlook, risks and contingencies
No quantified sales, earnings or margin guidance is provided. Management expected positive operating cash flow and believed operating cash flow plus available credit would be sufficient for working capital, capital spending, pension contributions and other requirements over the next 12 months and foreseeable future. The filing notes this depends on operating conditions and compliance with credit-facility terms.
Key risks include high leverage and debt covenants; rising grain, sugar, nut, packaging and energy costs (with drought-related commodity increases noted); continued cereal volume and market-share pressure; and execution of the stand-alone transition from Ralcorp services. The Battle Creek labor contract was due to expire in October 2012. One customer represented $54.2 of quarterly sales and $154.0 for the nine months.
Post disclosed restatements of its 2011 annual and December 2011 interim financial information. A prior material weakness in goodwill impairment controls caused a $63 understatement of the earlier impairment charge and corresponding goodwill overstatement. Management said the weakness did not continue to affect disclosure controls after the spin-off, and concluded disclosure controls were effective as of June 30; implementation of stand-alone financial controls was still underway. Credit-agreement waivers related to the restated statements included delivery conditions and deadlines. Management said pending legal matters were not expected to have a material effect; the filing provides no specific quantified litigation exposure.
Important facts for investors to verify
- Whether cereal volumes and market share stabilize, particularly for major brands, and whether pricing and trade-spending choices support revenue.
- How commodity inflation and lower production volumes affect gross margin, and whether those costs can be offset through pricing or operating measures.
- Post’s ability to meet debt covenants and service its obligations, including the first $30.5 senior-note interest payment due August 15, 2012 and scheduled term-loan amortization.
- Progress in replacing Ralcorp transition services, establishing reliable stand-alone controls, and completing reporting obligations associated with the credit waivers and prior restatements.
- Exposure to the significant customer, the Battle Creek labor-contract negotiation, and the uncertain tax position included in the reported tax expense.