Post Holdings, Inc. — FY2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2016. Post is a consumer packaged goods holding company with four reportable segments: Post Consumer Brands (cereal), Michael Foods Group (eggs, potatoes, cheese and pasta), Active Nutrition, and Private Brands (including nut butters, dried fruit and granola). Results reflect multiple acquisitions, including Willamette Egg Farms (WEF), acquired in October 2015.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $5,026.8 million | $4,648.2 million |
| Gross profit / margin | $1,547.4 million / 30.8% | $1,174.4 million / 25.3% |
| Operating profit / margin | $545.7 million / 10.9% | $212.7 million / 4.6% |
| Net loss | $3.3 million | $115.3 million |
| Net loss available to common shareholders | $28.4 million; $0.41 per diluted share | $132.3 million; $2.33 per diluted share |
| Cash from operations | $502.4 million | $451.6 million |
| Capital expenditures | $121.5 million | $107.9 million |
| Cash and cash equivalents | $1,143.6 million | $841.4 million |
| Debt, including short-term portion | $4,563.5 million carrying value; $4,600.3 million principal | $4,470.9 million carrying value |
Current assets were $2,076.9 million versus current liabilities of $634.0 million at year-end. The company reported $388.2 million of available capacity under its revolving credit facility. Working capital excluding cash, restricted cash and current debt was $303.2 million.
Material changes versus the prior comparable period
- Sales increased 8%, primarily from acquired businesses and growth in Premier Protein, legacy cereal, peanut butter and private-label granola; declines in several Michael Foods products and other product lines partly offset growth.
- Operating profit rose $333.0 million. Improvement reflected acquired-business contributions and stronger segment results, as well as no repeat of FY2015’s $60.8 million impairment charge. FY2016 operating profit also benefited from lower corporate expenses.
- Net loss narrowed, but interest expense rose to $306.5 million and the company recorded an $86.4 million debt-extinguishment loss and $182.9 million of other expense, principally non-cash interest-rate-swap mark-to-market losses.
- Operating cash flow increased $50.8 million, but management cited $184.9 million of unfavorable working-capital changes, mainly inventory rebuilding at Michael Foods as egg supply recovered and higher tax payments.
Segment results
- Post Consumer Brands: Sales of $1,728.2 million, up 37% including MOM Brands; segment profit was $290.4 million, up 41%. Excluding the acquisition effect, sales increased 2%.
- Michael Foods Group: Sales of $2,184.7 million, down 5%; segment profit increased 47% to $276.6 million. Egg volumes remained affected by the 2015 avian-influenza outbreak, while pricing, cost controls and improved results across businesses supported profit. Segment profit included a $28.5 million antitrust-litigation provision.
- Active Nutrition: Sales increased 4% to $574.7 million; segment profit improved to $44.7 million from a $13.8 million loss. Premier Protein sales grew 42%; Dymatize sales fell 25% amid supply issues and weak international sales.
- Private Brands: Sales increased 2% to $540.4 million; segment profit decreased 2% to $40.5 million, with unfavorable mix, compensation, foreign exchange and co-manufacturing costs among the pressures.
Outlook, risks and unusual items
- The filing provides no specific numerical FY2017 guidance. Management said cash on hand, operating cash flows and current or potential credit facilities are expected to fund foreseeable requirements, while noting cash generation depends on economic conditions, competition and other risks.
- Post issued $1.75 billion of 5.00% senior notes due 2026, using proceeds in part to repay $1.242 billion of 7.375% notes and the remaining $374.4 million term loan. Weighted-average interest rate on total debt was 6.3% at year-end. The company was in compliance with its credit covenants.
- Michael Foods faces egg-industry antitrust litigation. Claims are currently limited to shell eggs after egg-product claims were dismissed, subject to appeal; plaintiffs’ asserted damages exceed $1 billion in aggregate. Post accrued $28.5 million, but disclosed that ultimate losses could differ materially.
- Other key risks include substantial leverage and debt-service needs; commodity, energy and agricultural supply volatility; food safety, product-liability and regulatory exposure; customer concentration; acquisition integration; and intense competition and changing consumer preferences. Walmart represented approximately 13% of consolidated sales; Active Nutrition depended particularly on Costco and Sam’s Club.
- On October 3, 2016, after year-end, Post acquired National Pasteurized Eggs for $94.7 million, subject to adjustments. Purchase accounting was incomplete at filing, so acquired asset and liability values and pro forma results were not provided.
- FY2016 fourth-quarter net loss was $37.0 million, or $0.58 per share; net sales were $1,260.8 million. Full-year net loss was $3.3 million, while loss available to common shareholders was $28.4 million after preferred dividends.
Important facts for investors to verify
- Reconcile reported operating-profit improvement with acquisition contributions, prior-year impairment charges, integration costs and other corporate items.
- Assess the sustainability of segment margins, particularly as egg supply normalizes and Premier Protein growth, Dymatize recovery and cereal-category performance evolve.
- Review debt maturities, refinancing capacity, covenant headroom, interest-rate swaps and the cash required for interest and preferred dividends.
- Monitor the antitrust litigation, the adequacy of the $28.5 million accrual, and any subsequent rulings or settlement developments.
- Check post-year-end NPE acquisition accounting and its effect on goodwill, amortization, leverage and future results.