Colgate-Palmolive Company — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2019 periods unless otherwise noted.
Business context and results
Colgate-Palmolive sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories. About 70% of sales are generated outside the U.S. In Q3, reported sales rose 5.5%; organic sales, excluding foreign exchange and acquisitions, rose 7.5%. Volume increased 5.0%, pricing contributed 4.5%, foreign exchange reduced growth by 4.0%, and acquisitions contributed 2.0% to volume.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $4,153 | $3,928 | $12,147 | $11,678 |
| Gross profit | $2,540 | $2,316 | $7,374 | $6,911 |
| Operating profit | $1,018 | $856 | $2,916 | $2,623 |
| Net income attributable to Colgate-Palmolive | $698 | $578 | $2,048 | $1,724 |
| Diluted EPS | $0.81 | $0.67 | $2.38 | $2.00 |
| Gross margin | 61.2% | 59.0% | 60.7% | 59.2% |
| Operating margin | 24.5% | 21.8% | 24.0% | 22.5% |
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $2,756, up from $2,163. Management attributed the increase mainly to higher income, improved working capital, lower pension contributions and timing of tax payments.
- Capital expenditures were $249; investing activities used $668. Financing activities used $1,968, including $1,162 of dividends, $578 of treasury-share purchases and net debt repayments.
- Cash and cash equivalents were $989 at September 30, versus $883 at year-end 2019. Total debt was $7,236, down from $7,847; long-term debt including its current portion was $7,227.
- The company reported approximately $4.5 billion of unused credit lines and said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs. It stated that COVID-19 had not significantly affected liquidity through the period.
Material changes and unusual items
- Q3 sales growth was broad but uneven: Hill’s Pet Nutrition sales rose 11%, Europe rose 17% with a 9.5% volume contribution from Filorga, and Latin America reported sales down 5% as currency headwinds offset organic growth of 11.5%. Asia Pacific organic sales fell 1.0% over the first nine months.
- Q3 GAAP operating profit rose 19%. Excluding restructuring and acquisition-related items, management reported operating profit up 11% and diluted EPS of $0.79 versus $0.71. For the first nine months, adjusted operating profit rose 6% and adjusted diluted EPS rose 9% to $2.29.
- Margin improvement reflected cost savings and pricing, partly offset by higher raw and packaging material costs. Q3 SG&A rose 6% to $1,518; increased advertising and overhead contributed to higher adjusted SG&A as a share of sales.
- Nine-month results included $71 of discrete tax benefits: reversals of previously recorded foreign withholding tax and a deferred-tax-asset valuation allowance. Q3 included a $16 restructuring-accrual benefit; the restructuring program had concluded in 2019.
- The company acquired oral-care business Hello for $351 in January 2020 and bought the remaining interest in Filorga’s Hong Kong/China joint venture for approximately $99 in Q3. Filorga’s goodwill and indefinite-lived intangibles were not impaired in the Q1-triggered review; the company cautioned that later impairment remains possible.
Outlook, commentary and risks
Management gave no specific full-year sales or earnings guidance in the filing. It described the outlook as difficult to predict over the next six to twelve months because of COVID-19 and volatile category consumption. It expects post-pandemic category growth generally to remain below historical levels, with health and hygiene categories and pet nutrition more resilient. Planned 2020 capital expenditures were approximately 2.0%–2.5% of net sales; management’s current full-year effective tax-rate estimate before discrete items was 24.0%.
COVID-19 has driven pantry loading and higher demand in some hygiene categories, while oral-care and pet-food trends have normalized in some markets. The company cited occasional factory closures, absenteeism, supplier and customer disruption, product out-of-stocks, higher operating costs, and declines in professional and travel-retail channels. It also highlighted competition, retailer inventory and shelf-space decisions, e-commerce shifts, foreign-exchange volatility, and raw-material cost pressures.
Legal matters include Brazilian tax disputes, talcum-powder product claims, competition proceedings and an ERISA class action. The company estimated reasonably possible losses above accrued amounts of $0–$400 where estimable, but talc-case losses could not currently be reasonably estimated. Management said it did not expect the disclosed matters to materially affect consolidated financial position or ongoing results, while acknowledging an adverse outcome could materially affect a particular period.
Most important facts for investors to verify
- Whether organic sales momentum and pricing persist as pandemic-related demand and consumer purchasing patterns normalize.
- How foreign exchange and raw-material costs affect margins, particularly in emerging markets, and whether efficiency savings continue to offset them.
- Whether the $71 tax benefit and restructuring benefit distort comparisons with recurring earnings; compare GAAP results with the company’s reconciled non-GAAP measures.
- Whether cash generation, debt reduction and the resumption of moderated share repurchases remain consistent with management’s capital-allocation plans.
- Developments in Filorga’s performance and impairment headroom, and outcomes or estimates for legal contingencies, including the ERISA appeal and talc litigation.