Post Holdings, Inc. — Form 10-Q Summary
Business context and period: Consumer packaged goods holding company with five reportable segments: Post Consumer Brands, Weetabix, Michael Foods Group, Active Nutrition and Private Brands. Results cover the three months ended December 31, 2017, the first quarter of fiscal 2018, compared with the same quarter of 2016. Weetabix was acquired in July 2017, so its contribution was not included in the prior-year reported results. Amounts below are in millions, except per-share data and percentages.
Financial performance and position
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $1,433.1 | $1,249.8 |
| Gross profit / margin | $451.7 / 31.5% | $379.2 / 30.3% |
| Operating profit / margin | $164.5 / 11.5% | $76.2 / 6.1% |
| Net earnings | $294.9 | $101.8 |
| Diluted EPS | $3.82 | $1.27 |
| Cash provided by (used in) operations | $204.5 | ($19.4) |
Net earnings included a provisional $270.7 tax benefit from remeasurement of deferred tax balances following U.S. tax reform, partly offset by $7.1 of provisional transition-tax expense. Earnings also reflected a $37.3 loss on debt extinguishment and $2.7 of net interest-rate-swap gains. The comparable 2016 quarter included $144.5 of swap gains and a $74.5 legal-settlement provision. These unusual items make reported net-income comparisons less representative of underlying operating trends.
At December 31, 2017, cash and cash equivalents were $1,944.5, total assets $12,279.8 and total liabilities $9,239.4. Principal debt outstanding was $7,576.7; balance-sheet long-term debt was $7,512.6, plus $22.1 current portion. The company had $785.1 of available revolving-credit capacity after letters of credit. The filing reports no material change in market-risk sensitivity.
Financing cash flow was $259.6, including $1,000.0 proceeds from new notes, $635.5 of debt repayments and $56.0 of share repurchases. Investing cash outflow was $46.2, including $46.7 of capital expenditures. Operating cash flow improved from the prior-year outflow, with management citing Weetabix cash contribution, the prior-year $75.0 legal-settlement payment and timing of interest and other payments.
Material changes and segment results
Sales increased 15%, primarily reflecting Weetabix and growth in Michael Foods Group, Active Nutrition and Private Brands. Excluding Weetabix North America, Post Consumer Brands sales declined 4%. Operating profit rose $88.3, but increased $65.5 when comparing periods after excluding the respective $9.0 and $74.5 legal-settlement impacts, according to management.
| Segment | Sales | Segment profit | Notable comparison or driver |
|---|---|---|---|
| Post Consumer Brands | $456.0; +2% | $72.9; -12% | Excluding Weetabix NA, sales fell 4%; lower volumes and selling prices weighed on profit. |
| Weetabix | $99.7 | $16.8 | Current-period contribution; branded volume declines, mix, trade spending, inventory write-offs and integration costs pressured results. |
| Michael Foods Group | $577.1; +7% | $74.9 | Prior-year segment loss included the $74.5 legal provision; excluding it, profit increased $17.4, or 30%. |
| Active Nutrition | $186.0; +21% | $19.8; -20% | Profit included a $9.0 litigation-settlement accrual; excluding it, profit increased $3.9, or 16%. |
| Private Brands | $114.3; +5% | $8.4; +47% | Improved mix and selling prices partly offset lower volumes and higher costs. |
Outlook, risks and unusual items
- Outlook: No numerical earnings or sales guidance is provided in the filing text. Management expects positive operating cash flows and believes cash, operating cash flow and credit facilities can meet foreseeable requirements, while noting that performance depends on economic conditions, competition and other business risks.
- Bob Evans acquisition: Completed January 12, 2018, after quarter-end. The company paid $1,381.1 at closing and expected about $10.0 in additional payment, excluding appraisal claims. Purchase accounting and pro forma results were not yet available.
- Debt and liquidity: The December 2017 issuance of $1,000.0 of 5.625% notes due 2028 funded repayment of $630.0 of 6.00% notes due 2022 and part of the Bob Evans consideration. The refinancing resulted in a $37.3 extinguishment loss. Management describes leverage as a risk; the revolving facility’s leverage covenant was not applicable at quarter-end, and the company said it did not expect non-compliance in the foreseeable future.
- Legal matters: The $75.0 direct-purchaser egg antitrust settlement became final in December 2017, and an opt-out settlement was also reached. Remaining claims could still have a material adverse outcome; the company said a loss could not be estimated. Certain Bob Evans shareholders demanded appraisal, creating uncertain potential cash payments that could exceed the merger consideration. Bob Evans also retained guarantor obligations relating to certain restaurant-property leases.
- Other risks: Management identifies high leverage, acquisition integration and synergy execution, commodity and freight costs, competition and consumer preferences, litigation, foreign-exchange exposure, and possible impairment of goodwill or intangibles among relevant risks. Tax Act accounting remained provisional, with adjustments expected to be finalized by September 30, 2018.
- Controls: Management concluded disclosure controls were effective. Financial reporting was materially affected by transition to a new consolidation system; the company said controls over the new system were in place and operating effectively.
Important facts for investors to verify
- How much of reported earnings growth reflects ongoing operations versus the provisional tax benefit and prior-period swap and legal items.
- Post-Bob Evans debt, cash, purchase-price allocation, integration costs, synergies and appraisal-related cash exposure.
- Progress in Post Consumer Brands and Weetabix, including volume, pricing, mix and margin trends.
- Resolution and potential financial impact of remaining egg antitrust claims and other Bob Evans-related obligations.
- Final tax-reform adjustments and compliance with debt covenants as financing and acquisition effects flow through later periods.