Post Holdings, Inc. — FY2012 Form 10-K
Business context and reporting period
Fiscal year ended September 30, 2012; the filing also reports unaudited quarterly results, including Q4. Post manufactures and markets branded ready-to-eat cereals in the U.S. and Canada, with one operating segment and four manufacturing facilities. It ranked third in U.S. ready-to-eat cereal sales, with 10.4% retail-dollar share. Post became an independent public company through its February 3, 2012 spin-off from Ralcorp, so earlier periods reflect the cereal business as part of Ralcorp and are not necessarily representative of a standalone company.
Financial results and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $958.9 million | $968.2 million |
| Gross profit / margin | $428.9 million / 44.7% | $451.6 million / 46.6% |
| Operating profit (loss) | $139.1 million | ($368.6 million) |
| Net earnings (loss) | $49.9 million | ($424.3 million) |
| Diluted EPS | $1.45 | ($12.33) |
| Cash from operations | $144.0 million | $143.8 million |
| Cash and cash equivalents at year-end | $58.2 million | $1.7 million |
| Total debt at year-end | $945.6 million | $784.5 million |
Q4 FY2012 revenue was $247.2 million, gross profit $110.1 million, net income $10.8 million, and diluted EPS $0.31 (basic EPS $0.32). Q4 FY2011 revenue was $237.8 million and gross profit $102.8 million; the quarter included a large impairment and reported a $479.6 million net loss.
FY2012 investing cash outflow was $30.9 million, primarily capital spending; financing cash outflow was $57.1 million. Year-end current assets were $209.7 million and current liabilities $126.4 million; working capital excluding cash was $25.1 million. The $350 million senior secured credit facility included a $170.6 million term-loan balance and an undrawn revolver with $174.5 million available after letters of credit. The $775 million senior notes bear 7.375% interest and mature in 2022; the term loan matures in 2017 and bears variable rates.
Material changes versus prior periods
- Sales declined 1% year over year, mainly because total volume fell 3%, partly offset by higher average selling prices. Market share fell 0.4 percentage point. Honey Bunches of Oats volume declined 2%, Pebbles declined 6%, while Great Grains volume rose 10%.
- Gross margin fell 1.9 percentage points, reflecting $26.5 million of higher raw-material costs, $7.4 million of unfavorable manufacturing costs, and $3.3 million of higher freight costs.
- SG&A rose to $274.5 million from $239.5 million, including $12.5 million of spin-off and stand-alone transition costs, higher advertising, and expenses for a direct sales force and public-company operations.
- The swing from FY2011 loss to FY2012 profit was largely due to the prior-year $566.5 million goodwill and intangible-asset impairment. Excluding that FY2011 charge, operating profit margin was 20.4% in FY2011 versus 14.5% in FY2012; current-year margin pressure therefore persisted.
- Debt increased with the spin-off financing. In October 2012, after fiscal year-end, Post issued an additional $250 million of 7.375% notes at 106% of par, generating $265 million before expenses.
Outlook, risks, contingencies and unusual items
- No quantified earnings or sales guidance is provided. Management planned to support brands with marketing, improve pricing and product quality, expand distribution in underrepresented channels, pursue cost efficiencies, and consider acquisitions.
- Management expected certain commodity costs to continue rising into FY2013, citing the U.S. drought and increases in grains and sugar. Price increases may not fully offset cost inflation amid intense promotional competition and a mature cereal category.
- Leverage, variable-rate borrowing, debt covenants, and substantial interest and principal obligations constrain financial flexibility. Management said operating cash flow and credit facilities were expected to meet foreseeable needs, subject to operating performance and compliance with covenants.
- Customer concentration is significant: the top ten customers represented about 55% of FY2012 gross sales, and Walmart about 21% of net sales. Many customers have no long-term supply commitments.
- Post reported no goodwill or indefinite-lived trademark impairment in FY2012. However, the estimated fair values of the Post and Shreddies trademarks only slightly exceeded carrying values, leaving them sensitive to weaker forecasts or higher discount rates.
- The company disclosed prior-period financial-statement restatements and identified errors in interim FY2012 cash-flow statements. It said the errors were not material; a planned revision would increase operating cash flow and reduce financing cash flow by $10 million for the six- and nine-month interim comparisons. Management believed the previously identified material weakness did not exist at September 30, 2012; the 10-K did not include a Section 404 management or auditor report because of the new-issuer transition period.
- Environmental authorities had issued notice of potential liability concerning air emissions at the Modesto facility. Post expected former owners to indemnify a significant portion and said it had reserves for the remainder. Management considered pending legal and regulatory exposures not material in aggregate based on information then available.
- Other key risks include dependence on Ralcorp transition services while building standalone systems, pension funding, labor disruptions, food safety and recalls, and potential tax indemnification obligations related to the spin-off. The company paid $53.4 million to repurchase 1.75 million shares from Ralcorp in September 2012 and stated it had no foreseeable cash-dividend plans.
Important facts for investors to verify
- Whether volume, market share, and core operating margins stabilize, particularly against commodity inflation and promotional competition.
- Debt-service capacity, covenant headroom, available revolver capacity, and the effect of the October 2012 note issuance on leverage and interest costs.
- Customer concentration and the company’s ability to retain shelf space and distribution at major retailers.
- Progress in replacing Ralcorp-provided services and maintaining effective standalone financial reporting controls after the restatement and cash-flow revisions.
- Brand valuation assumptions and any further impairment risk, particularly for the Post and Shreddies trademarks.
- Potential costs from Modesto environmental matters, pension obligations, labor negotiations, and spin-off tax indemnities.