Post Holdings, Inc. — Fiscal 2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. This is an annual report; the filing provides quarterly data but not a standalone fiscal Q4 narrative. Amounts are in U.S. dollars unless noted.
Business context
Post is a consumer packaged goods holding company with five reportable segments at year-end: Post Consumer Brands, Weetabix, Refrigerated Food, Active Nutrition and Private Brands. Fiscal 2018 results include Bob Evans, acquired in January 2018, and a full year of Weetabix, acquired in July 2017; prior-year comparisons are therefore affected by acquisitions. On October 1, 2018, Post completed the 8th Avenue transaction: its private-label business was deconsolidated, and Post retained a 60.5% common-equity interest accounted for under the equity method.
Key financial metrics
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $6,257.2 million | $5,225.8 million | Up 20%, mainly from Bob Evans and Weetabix contributions, plus growth across segments |
| Gross profit / margin | $1,866.8 million / 29.8% | $1,574.1 million / 30.1% | Gross profit rose; margin eased approximately 0.3 percentage points |
| Operating profit / margin | $587.5 million / 9.4% | $520.3 million / 10.0% | Up 13%; includes $124.9 million impairment versus $26.5 million in FY2017 |
| Net earnings | $467.3 million | $48.3 million | FY2018 includes a substantial one-time tax benefit; not directly indicative of recurring performance |
| Net earnings available to common shareholders | $457.3 million | $34.8 million | Diluted EPS was $6.16 versus $0.50 |
| Operating cash flow | $719.3 million | $386.7 million | Up $332.6 million; FY2017 included $103.0 million of legal settlement payments |
| Capital expenditures | $225.0 million | $190.4 million | Increase primarily related to cage-free egg housing conversion |
| Cash and cash equivalents | $989.7 million | $1,525.9 million | Down $536.2 million year over year |
| Debt principal | $7,917.4 million | $7,212.2 million | FY2018 figure includes the $625.0 million bridge loan classified as held for sale |
Net cash used in investing activities was $1,676.9 million, principally reflecting $1,454.4 million of acquisition spending. Net cash provided by financing activities was $423.4 million. Working capital, excluding cash, restricted cash and current debt, was $435.8 million, compared with $403.5 million. Interest expense rose 23% to $387.3 million; the weighted-average interest rate on total debt was 5.0%, versus 5.5%.
Segment performance and material changes
- Post Consumer Brands: Sales increased 5% to $1,831.7 million, while segment profit declined 7% to $329.2 million; margin fell from 20% to 18%. Higher manufacturing, raw-material and freight costs weighed on profit.
- Weetabix: Sales were $423.4 million and segment profit $87.2 million, with the year-over-year comparison significantly affected by the additional nine months included after acquisition. Management cited weaker branded cereal and drink volumes, partly offset by pricing and foreign exchange.
- Refrigerated Food: Sales rose 25% to $2,337.9 million and segment profit increased to $247.6 million, reflecting Bob Evans and improved egg and side-dish results. Results also included legal provisions, integration costs and a $7.0 million impact from facility service issues.
- Active Nutrition: Sales rose 16% to $827.5 million and segment profit rose 29% to $124.4 million. Ready-to-drink volumes grew, while powder and bar volumes declined; segment profit included a $9.0 million litigation settlement accrual.
- Private Brands: Sales increased 7% to $848.9 million and segment profit increased 5% to $60.8 million. Following the October 1 transaction, this business is no longer consolidated or reported as a Post segment.
Outlook, risks, contingencies and unusual items
- Management stated that cash on hand, operating cash flows and available credit facilities should be sufficient for foreseeable working-capital, debt-service, capital-expenditure and other financing needs. The filing does not provide a specific FY2019 earnings or revenue forecast.
- Post announced on November 15, 2018 its intention to pursue an IPO of Active Nutrition. The filing cautions that the transaction may not occur on expected terms or at all and could divert management resources or disrupt operations.
- The 8th Avenue transaction generated $875.0 million of gross proceeds, including $250.0 million from THL and a $625.0 million bridge loan assumed by 8th Avenue. Post used net proceeds to repay approximately $863.0 million of its term loan. After closing, 8th Avenue was unconsolidated and Post’s retained interest is equity-method accounted for.
- FY2018 recorded a $204.0 million income tax benefit and a negative 77.1% effective tax rate, principally reflecting a provisional $281.2 million benefit from remeasuring deferred tax balances under the Tax Cuts and Jobs Act, partly offset by a provisional $10.3 million transition-tax expense. The tax accounting remained subject to finalization.
- Other notable items included a $124.9 million non-cash impairment of the Weetabix trademark, related to lower branded cereal volumes following pricing changes and consumer shifts toward private label. Weetabix goodwill passed impairment testing, but its estimated fair value exceeded carrying value by only 6%.
- Bob Evans appraisal proceedings cover approximately 3.3 million shares; Post accrued $267.0 million, including estimated interest, and the final payment could differ. Egg-product antitrust claims remain pending against Michael Foods for certain opt-out plaintiffs; a $6.0 million accrual was recorded. Post also disclosed continuing guarantees on leases for 143 former Bob Evans restaurant properties.
- Key risks include substantial leverage and debt covenants; commodity, freight and energy volatility; customer concentration (Walmart represented about 13% of consolidated sales); competition and changing consumer preferences; acquisition integration; food safety and supply-chain disruption; foreign exchange and Brexit uncertainty; and possible further intangible-asset impairment.
- Post paid no common-stock dividends in FY2018 or FY2017 and reported no fourth-quarter FY2018 share repurchases. The independent auditor issued an unqualified opinion and concluded internal control over financial reporting was effective; certain unintegrated Bob Evans controls were excluded from the assessment.
Important facts for investors to verify
- Separate acquisition-driven sales growth from underlying organic volume, pricing and mix trends, particularly in Refrigerated Food and Weetabix.
- Assess recurring earnings and cash generation without the Tax Act benefit, impairment and legal or acquisition-related items; reconcile segment profit to reported operating profit.
- Confirm post-transaction debt, interest expense and liquidity after the bridge loan transfer and term-loan repayment, and review covenant headroom and maturities.
- Track the Active Nutrition IPO plan and the financial impact of 8th Avenue as an equity-method investment, including THL’s preferred-stock terms and governance rights.
- Monitor resolution and potential cash requirements for Bob Evans appraisal proceedings, remaining egg antitrust claims and the former restaurant lease guarantees.
- Review future performance of the Weetabix and Bob Evans brands and impairment sensitivities, as well as execution costs and expected benefits from acquisitions and operational initiatives.