Business context and reporting period
Post Holdings, Inc. is a consumer packaged goods holding company with five reportable segments: Post Consumer Brands, Weetabix, Foodservice, Refrigerated Retail and Active Nutrition. This unaudited Form 10-Q covers the three and six months ended March 31, 2019, compared with the same periods in 2018. Amounts are in millions of dollars except per-share data.
Comparisons are affected by the October 1, 2018 separation of the private brands business into 8th Avenue Food & Provisions. Post retained a 60.5% interest, now accounted for under the equity method, rather than consolidating that business. The fiscal 2019 segment presentation was also reorganized.
Financial performance and liquidity
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net sales | $1,387.8 vs. $1,586.1; down 13% | $2,799.1 vs. $3,019.2; down 7% |
| Gross profit / margin | $451.3 / 32.5%; prior $472.4 / 29.8% | $877.8 / 31.4%; prior $920.9 / 30.5% |
| Operating profit / margin | $186.3 / 13.4%; prior $160.7 / 10.1% | $480.2 / 17.2%; prior $321.7 / 10.7% |
| Net earnings | $44.0 vs. $91.5 | $169.6 vs. $386.4 |
| Diluted EPS | $0.58 vs. $1.20 | $2.26 vs. $5.04 |
| Operating cash flow | Not separately presented in the excerpt | $204.8 vs. $263.6 |
Six-month operating profit included $127.3 of gain on the 8th Avenue transaction and $0.6 on the sale of a warehouse. Excluding these gains and the prior-year $11.0 legal settlement provision, management said operating profit increased $19.6, or 6%. Net earnings comparisons are also affected by a $231.9 tax benefit in the 2018 six-month period related principally to the Tax Cuts and Jobs Act.
Quarterly reported sales fell mainly because 8th Avenue sales were no longer consolidated; the absence of the prior-year Private Brands sales was partly offset by Bob Evans acquisition contributions and growth in certain segments. Six-month sales also exclude Private Brands, partly offset by Bob Evans. In the quarter, segment profit rose in Active Nutrition, Foodservice, Refrigerated Retail and Weetabix, while Post Consumer Brands declined. Active Nutrition segment profit increased 69% to $44.0; Foodservice increased 10% to $47.4; Refrigerated Retail increased 34% to $26.5; and Weetabix increased 50% to $23.6. Post Consumer Brands segment profit fell 9% to $83.2.
At March 31, 2019, cash and cash equivalents were $149.7; restricted cash was $2.2. Current assets were $1,253.8 and current liabilities $649.4. Long-term debt carrying value was $6,326.2, with $6.7 current; principal debt outstanding was $6,369.3. The $800.0 revolving facility had $777.2 available after letters of credit. The company repaid $863.0 of term-loan principal and repurchased $60.0 principal of senior notes in the six-month period. Cash declined $842.6 to $151.9 including restricted cash, reflecting $1,209.4 of financing outflows, partly offset by investing inflows including sale proceeds.
Changes, outlook, risks and unusual items
- Interest-rate swap results were a major earnings volatility item: the company recorded $63.0 of swap expense in the quarter and $114.7 for six months, largely non-cash mark-to-market losses. The prior-year periods included swap gains of $50.5 and $53.2, respectively.
- The 8th Avenue transaction generated $875.0 gross proceeds plus $16.8 in final working-capital adjustments. Post applied proceeds toward debt repayment and retains an equity-method investment; its share of 8th Avenue’s losses was $8.8 for the quarter and $19.5 for six months.
- Cash from operations was down $58.8 year over year for six months. Management cited inventory-building, the loss of Private Brands’ consolidated cash flows, higher tax payments and a $9.0 legal settlement payment, partly offset by swap-related proceeds and Bob Evans cash flows.
- Management stated that cash on hand, operating cash flows and current or potential credit facilities should be sufficient for foreseeable requirements, while noting that cash generation depends on economic conditions, competition and other business risks. No quantified earnings or sales guidance is provided in the filing.
- On April 8, 2019, Post announced confidential submission of a draft registration statement for a proposed Active Nutrition IPO; there is no assurance it will proceed. The filing also identifies the timing and completion of a proposed acquisition of TreeHouse Foods’ private-label RTE cereal business as uncertain.
- Risks include high leverage and debt service, commodity and freight costs, consumer demand and brand competition, integration and acquisition execution, currency and interest-rate movements, and potential impairment of goodwill or intangibles. The Bob Evans appraisal action remains pending for approximately 2.5 million shares; the company accrued $14.0 for interest after prepaying merger consideration. A remaining egg-products antitrust matter could still have a material adverse outcome; $6.0 was accrued. Management does not expect the Weetabix environmental matter to be material.
- The Clinton, Massachusetts cereal facility closure was expected to be completed by September 2019; $4.7 of restructuring charges remained expected. Adoption of lease accounting on October 1, 2019 was expected to materially increase assets and liabilities, but the impact was not yet quantifiable.
Most important facts for investors to verify
- Separate underlying operating trends from divestiture, acquisition, one-time gains and accounting-presentation effects when assessing sales and profit growth.
- Track Active Nutrition performance, including the sharp decline in nutrition-bar sales and the reintroduction of RTD shake flavors after inventory constraints.
- Review debt repayment capacity, interest costs, liquidity and covenant headroom; the revolver leverage test was not triggered at quarter-end, and management reported interest coverage above the stated threshold.
- Monitor cash conversion and the inventory build, capital spending, including the Norwalk egg facility, and the effect of working-capital needs on cash.
- Follow the proposed Active Nutrition IPO and TreeHouse acquisition, and the outcomes of Bob Evans appraisal and egg antitrust proceedings.