Post Holdings, Inc. — Q1 FY2017 10-Q
Reporting period: Three months ended December 31, 2016, compared with the three months ended December 31, 2015, unless otherwise noted. Post is a consumer packaged goods holding company with four reportable segments: Post Consumer Brands, Michael Foods Group, Active Nutrition and Private Brands. Amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $1,249.8 | $1,248.8 |
| Gross profit / margin | $379.2 / 30.3% | $362.5 / 29.0% |
| Operating profit / margin | $76.2 / 6.1% | $132.9 / 10.6% |
| Net earnings | $97.6 | $25.5 |
| Net earnings available to common shareholders | $94.2 | $10.5 |
| Diluted EPS | $1.22 | $0.15 |
| Cash from operating activities | $(23.6) | $88.7 |
| Capital expenditures | $31.8 | $18.5 |
Net earnings included a $144.5 net gain on interest-rate swaps, primarily a non-cash $145.0 mark-to-market gain, compared with a $15.9 loss in the prior-year quarter. This substantially affected reported earnings and is not an operating performance indicator. Operating profit declined $56.7, principally because of $74.5 in egg-antitrust settlement expense; excluding that charge, operating profit increased $17.8, or 13%, according to management. Interest expense fell $4.9 to $72.9; the weighted-average interest rate on outstanding debt was 6.3%, versus 6.9%.
Segments and material changes
| Segment | Sales | Segment profit (loss) | Notable change |
|---|---|---|---|
| Post Consumer Brands | $420.6, up 2% | $81.6, up 30% | Improved mix, pricing and lower manufacturing and integration costs lifted margin to 19% from 15%. |
| Michael Foods Group | $539.8, down 8% | $(17.0), versus $80.8 | Included $74.5 in legal settlement expense. Sales excluding NPE declined 12%; egg prices were lower, and cheese, dairy and pasta were weaker. |
| Active Nutrition | $153.9, up 33% | $24.9, up 137% | Protein shake and ready-to-drink growth drove results; margin rose to 16% from 9%. |
| Private Brands | $135.6, flat | $7.0, down 46% | Manufacturing inefficiencies, freight and labor costs, lower volumes and higher ingredient costs pressured profit. |
Net sales were nearly unchanged overall: growth in NPE, protein shakes, cereal, organic peanut butter and granola was largely offset by lower sales in several egg, dairy, pasta and nutrition products and the prior-year Canadian egg business divestiture. NPE was acquired on October 3, 2016 for a closing payment of $97.0, subject to final adjustments; it contributed $23.3 of sales and a $2.1 operating loss in the quarter.
Cash, debt and liquidity
- Cash and cash equivalents were $869.1 at December 31, 2016, down from $1,143.6 at September 30, 2016. Cash declined $274.5 during the quarter.
- Operating cash use was $23.6, mainly reflecting the $75.0 antitrust settlement payment, higher advertising and promotion payments and incentive payouts. Investing cash use was $121.8, including $91.4 for acquisitions and $31.8 in property additions. Financing cash use was $128.4, including $133.1 in share repurchases.
- Long-term debt carrying value was $4,552.5, plus $8.8 current portion. Outstanding debt principal was $4,597.0; the revolving facility had $387.8 available after letters of credit. The company reported compliance with credit covenants and said it did not expect noncompliance in the foreseeable future.
- Management said cash on hand, operating cash flows and current or potential credit facilities should be sufficient for foreseeable requirements, while noting that operating cash generation depends on economic conditions, competition and other risks.
- Post repurchased 1.7 million shares for $133.1 at an average $76.32 per share; $166.9 remained under the $300.0 million authorization at December 31, 2016.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or sales guidance. Management expects to continue generating positive operating cash flows but cautions that actual results may vary.
- The direct-purchaser egg-antitrust settlement of $75.0 had been paid into escrow and remained subject to court approval. Michael Foods also reached a confidential settlement with certain opt-out plaintiffs in January 2017. Claims by indirect purchasers and certain opt-out plaintiffs remain; the company said any remaining loss could not be estimated.
- Management warned that continued weakness in the specialty sports-nutrition channel could require reassessing Dymatize’s long-term expectations and could result in a potentially material goodwill impairment.
- Other key risks cited include high leverage and debt service, commodity and input-cost volatility, consumer demand and competitive pressures, acquisition integration, supply-chain disruption, litigation, and potential goodwill or intangible impairment.
- The Farmers Branch, Texas facility was sold in December 2016. The company reported no additional restructuring costs expected in fiscal 2017.
Important facts for investors to verify
- Whether the $75.0 direct-purchaser settlement receives court approval and the financial terms and scope of the confidential opt-out settlement.
- How much reported earnings depend on non-cash swap valuation changes, and how those derivatives may affect future results and cash settlements.
- Whether operating cash flow recovers after settlement payments and working-capital outflows, and the impact of ongoing capital spending and acquisitions.
- Trends in Michael Foods egg pricing and segment profitability, Active Nutrition growth, and Private Brands cost pressures.
- Dymatize channel performance and the risk of a goodwill impairment; also monitor debt levels, covenant headroom and liquidity.