Post Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018. The filing is unaudited. Post is a consumer packaged goods company with five reportable segments: Post Consumer Brands, Weetabix, Refrigerated Food, Active Nutrition and Private Brands.
Financial performance and position
| Metric | Three months ended June 30, 2018 | Prior-year quarter | Nine months ended June 30, 2018 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,608.1 million | $1,272.1 million | $4,627.3 million | $3,777.3 million |
| Operating profit | $187.8 million | $190.5 million | $516.6 million | $404.2 million |
| Net earnings (loss) | $96.5 million | $(59.4) million | $482.9 million | $40.3 million |
| Diluted EPS | $1.29 | $(0.93) | $6.34 | $0.43 |
- Quarterly sales rose 26%; nine-month sales rose 23%, mainly reflecting the Bob Evans acquisition, the inclusion of Weetabix, and growth across segments. Quarterly operating profit fell 1% despite higher sales.
- Quarterly gross profit was $461.4 million, a 28.7% gross margin, versus $393.7 million and 30.9% a year earlier. Operating margin was 11.7%, versus 15.0%.
- Quarterly total segment profit was $218.8 million, up from $179.2 million. Refrigerated Food and Active Nutrition improved; Post Consumer Brands profit declined to $83.3 million from $96.9 million. Nine-month segment profit was $621.4 million versus $439.2 million.
- Operating cash flow for the nine months was $591.1 million, compared with $214.4 million. Investing used $1,598.8 million, principally reflecting $1,454.0 million of net acquisition spending. Financing used $173.9 million. Cash fell by $1,183.3 million to $342.6 million.
- At June 30, cash was $342.6 million; current assets were $1,529.1 million and current liabilities $787.9 million. Debt principal outstanding was $7,304.4 million. The $800 million revolving facility had $782.7 million available after letters of credit; no revolving borrowing was reported.
- Quarterly net earnings benefited from a $17.2 million net gain on interest-rate swaps and a $6.1 million gain on debt extinguishment. Nine-month earnings included a provisional $283.1 million tax benefit from remeasuring deferred taxes under the Tax Act; the nine-month effective tax rate was negative 81.0%.
Material changes and segment trends
- Bob Evans was acquired on January 12, 2018, for a preliminary total acquisition cost of $1,723.6 million. It contributed $112.0 million of quarterly sales and $9.9 million of quarterly operating profit. Purchase accounting remains provisional; appraisal claims remain outstanding.
- Refrigerated Food quarterly sales increased 32% to $613.1 million, substantially reflecting Bob Evans; segment profit rose 37% to $56.5 million. Active Nutrition sales increased 15% and segment profit 44%, with strong ready-to-drink product volumes. Post Consumer Brands sales rose 9%, but segment profit fell 14%, partly from manufacturing costs, downtime, raw-material and freight costs.
- Weetabix reported quarterly sales of $107.1 million and segment profit of $26.1 million. Private Brands sales increased 9% to $209.1 million, while segment profit was broadly flat at $12.7 million.
- Post issued $1 billion of 5.625% senior notes due 2028, used proceeds in part to refinance $630 million of 6.00% notes and fund Bob Evans, and repurchased $261.3 million of debt principal and $218.7 million of common stock during the nine months.
Outlook, risks and unusual items
- No specific earnings or sales guidance is provided. Management said it expects to generate positive operating cash flows and believes cash, operating cash flows and current or potential credit facilities will meet foreseeable financing needs, while noting this depends on business conditions and other risks.
- On August 2, 2018, after the reporting date, Post and THL agreed to capitalize the Private Brands business through 8th Avenue. Post expects $875 million in proceeds and to retain 60.5% of common equity; THL is to receive 39.5% of common equity and preferred stock. Closing was expected in October 2018, subject to financing, credit-document amendments and regulatory and other conditions. The transaction was not completed as of this filing.
- Post expects total charges of $11.6 million to close its Clinton, Massachusetts cereal facility by September 2019; $3.6 million had been incurred by June 30.
- Bob Evans appraisal proceedings cover approximately 3.3 million shares. Post accrued $262.1 million, including interest, but says the final amount could differ materially. Remaining egg-products antitrust claims also could have a material adverse outcome; the company says a loss cannot currently be estimated.
- Other key exposures include high leverage and interest costs, commodity, freight and foreign-exchange volatility, acquisition integration and impairment risks, pension funding, and uncertainty in final Tax Act accounting. Management expected to finalize Tax Act adjustments by December 31, 2018.
Important facts for investors to verify
- How much of sales and earnings growth is organic versus acquired, and whether segment margins recover, particularly in Post Consumer Brands.
- The final Bob Evans purchase accounting and appraisal-proceeding outcome, including potential payments above the $262.1 million accrual.
- Cash conversion, acquisition and other capital needs, and the effect of $7.3 billion in debt and related interest costs on liquidity.
- Whether the 8th Avenue transaction closes on the expected terms and timing, including bridge-loan refinancing, required approvals and the effect of retained ownership and preferred-stock claims.
- Final Tax Act adjustments and the underlying earnings excluding the provisional tax benefit and non-cash derivative gains.