Colgate-Palmolive Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Dollar amounts are in millions except per-share data. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition in more than 200 countries and territories.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $3,897 | $3,866 | $7,994 | $7,750 |
| Operating profit | $946 | $888 | $1,898 | $1,767 |
| Net income attributable to Colgate | $635 | $586 | $1,350 | $1,146 |
| Diluted EPS | $0.74 | $0.68 | $1.57 | $1.33 |
| Operating margin | 24.3% | 23.0% | 23.7% | 22.8% |
- Q2 reported sales rose 1.0%; organic sales grew 5.5%, as volume and pricing gains were substantially offset by unfavorable foreign exchange. For the first half, reported sales rose 3.0% and organic sales grew 6.5%.
- Q2 gross margin was 60.8%, up 110 basis points GAAP (120 basis points excluding prior-year restructuring charges). Cost savings and pricing more than offset higher raw and packaging material costs. Adjusted operating margin increased 30 basis points in Q2 and 10 basis points for the first half; prior-year restructuring charges make GAAP comparisons less representative.
- Hill’s Pet Nutrition was a growth leader: Q2 sales rose 9.5% and organic sales 11.5%; first-half sales rose 14.5% and organic sales 16.0%. Q2 Oral, Personal and Home Care sales declined 1.0% reported, while organic sales increased 4.0%.
- First-half net cash from operations was $1,794, versus $1,249 a year earlier. Capital expenditures were $159; dividends paid were $784. Cash increased to $997 from $883 at year-end 2019.
- Total debt was $7,392 at June 30, 2020, down from $7,847 at December 31, 2019; long-term debt including current maturities was $7,139. Current assets were $4,212 and current liabilities $4,580. The company reported approximately $4,500 of unused credit lines and said operating cash flow and debt issuance should cover foreseeable needs.
Material changes and unusual items
- First-half GAAP results included a $71 discrete tax benefit from reversals of previously recorded foreign withholding taxes and a deferred-tax-asset valuation allowance. This reduced the reported first-half effective tax rate to 20.3%; the non-GAAP rate was 24.3%.
- Q2 2019 included $40 of restructuring-program charges in operating profit; the program ended in 2019. Excluding specified unusual items, Q2 diluted EPS grew 3% to $0.74, and first-half diluted EPS grew 7% to $1.49.
- Colgate acquired oral-care business Hello Products for $351 in January 2020. The 2019 Filorga skin-health acquisition contributed to European sales; purchase-price allocations remained preliminary. First-half investing cash outflow included $352 for acquisitions.
- Share repurchases under the company’s public program were suspended in Q2 amid COVID-19 uncertainty. Management expected to resume moderated repurchases in the second half of 2020; this was an expectation, not a guarantee.
Outlook, commentary and risks
Management gave no specific full-year sales or earnings guidance in the provided filing text. It said pandemic-related demand volatility makes category growth difficult to predict over the next six to twelve months. Demand was elevated for hand soap, dish liquid, bar soap and cleaners, with some increase viewed as potentially lasting; trends in oral care and pet food had normalized in Q2. The company also reported supply constraints, occasional out-of-stocks, limited factory closures and lower activity in channels such as professional sales and travel retail.
Management cited COVID-19 uncertainty, foreign-exchange volatility, raw and packaging material costs, competitive and promotional pressure, retailer inventory and shelf-space decisions, and rapid e-commerce growth as risks. It expected 2020 capital expenditures of approximately 2.0%–2.5% of net sales. Filorga was not impaired in the first-quarter test, but its fair value exceeded carrying value by only 10%; management warned that changed assumptions or weaker results could lead to future impairment.
For disclosed matters with estimable potential losses, reasonably possible losses in excess of accrued liabilities were estimated at $0–approximately $175. Some claims, including talc and an ERISA matter, could not be reasonably estimated; management said adverse outcomes could materially affect an individual quarter or year. The filing also describes Brazilian tax disputes, including assessments of approximately $113 and $47, which the company is contesting.
Investor verification points
- Track organic growth, foreign-exchange effects, and whether pandemic-era demand and product availability persist as consumer purchasing patterns normalize.
- Assess segment performance—especially Hill’s growth and regional Oral, Personal and Home Care trends—alongside rising advertising, overhead and input costs.
- Reconcile GAAP and non-GAAP results, particularly the $71 tax benefit and prior-year restructuring charges, when evaluating earnings growth.
- Monitor debt, working capital, cash generation, capital spending and the timing of any resumption of share repurchases.
- Review Filorga valuation assumptions and developments in the disclosed legal matters; several potential exposures remain uncertain or not estimable.