Colgate-Palmolive Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions of U.S. dollars, except per-share data and percentages. The filing is unaudited.
Business context
Colgate operates in Oral, Personal and Home Care and Pet Nutrition, selling in more than 200 countries and territories. Approximately 70% of sales came from outside the U.S. and approximately 50% from emerging markets. The company is prioritizing Oral Care, Personal Care and Pet Nutrition, supported by cost-saving programs and investment in innovation, marketing and e-commerce.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $3,928 | $3,845 | $11,678 | $11,733 |
| Operating profit | $856 | $874 | $2,623 | $2,803 |
| Net income attributable to Colgate | $578 | $523 | $1,724 | $1,794 |
| Diluted EPS | $0.67 | $0.60 | $2.00 | $2.05 |
| Gross margin | 59.0% | 59.0% | 59.2% | 59.5% |
| Operating margin | 21.8% | 22.7% | 22.5% | 23.9% |
- Sales trends: Q3 sales grew 2.0%; organic sales grew 4.5%, reflecting volume growth of 3.0% and pricing of 1.5%, partly offset by 2.5% unfavorable foreign exchange. For the first nine months, reported sales fell 0.5% while organic sales increased 3.5%; foreign exchange reduced sales growth by 4.0%.
- Profitability: Q3 reported operating profit declined 2%; excluding restructuring and acquisition costs, operating profit was essentially flat at $900 versus $899. Nine-month reported operating profit fell 6%; adjusted operating profit also fell 6%, to $2,735. The company attributed margin pressure principally to higher raw and packaging costs and increased advertising and overhead, partly offset by pricing and cost savings.
- Adjusted earnings: Excluding specified items, Q3 net income was $614 versus $625 and diluted EPS was $0.71 versus $0.72. For nine months, adjusted net income was $1,813 versus $1,952 and adjusted diluted EPS was $2.10 versus $2.23. These are company-presented non-GAAP measures.
- Segments: Q3 Pet Nutrition sales increased 8.5% and organic sales 10.0%; Oral, Personal and Home Care sales increased 1.0% and organic sales 3.5%. Pet Nutrition operating margin declined 130 basis points. Year-to-date global toothpaste share was 41.2%, down 0.8 points, and manual toothbrush share was 31.6%, down 0.6 points.
- Cash flow: Nine-month operating cash flow was $2,163, down from $2,194. Capital expenditures were $226 versus $321; operating cash flow less capital expenditures was $1,937 versus $1,873. Investing used $2,075, including $1,711 of acquisition payments. Financing provided $150, compared with $1,701 used in the prior-year period.
- Debt and liquidity: Cash was $948 at September 30, 2019, versus $726 at year-end 2018. Total debt was $8,151, up from $6,366; long-term debt, including current portion, was $7,648. Commercial paper outstanding was $2,275. Current assets of $4,349 compared with current liabilities of $4,231. Shareholders’ equity attributable to Colgate was negative $324; total equity was $174.
- Shareholder returns: Nine-month dividends paid were $1,140 and treasury-share purchases were $1,024. The annualized dividend was increased to $1.72 per share, effective in Q2 2019.
Material changes and unusual items
- Colgate acquired premium skin-health business Filorga on September 19 for approximately $1.7 billion, plus additional consideration, funded with cash and debt. Preliminary purchase accounting included $1,002 of goodwill and $946 of other intangible assets. Filorga’s post-acquisition results were immaterial to Q3. The company also acquired a 51% controlling interest in a Nigeria joint venture for $31.
- Debt and goodwill/intangible balances rose substantially, primarily in connection with Filorga. Management said it planned to moderate share repurchases over the following 18–24 months because of incremental acquisition-related debt.
- The Global Growth and Efficiency Program was expanded October 31, 2019. Total expected pretax charges were raised to $1,865–$1,875, with annual pretax savings projected at $640–$660 once approved and implemented. The company expected substantially all charges by year-end 2019 and a net workforce reduction of approximately 4,000–4,400 positions. About 75% of program charges are expected to require cash expenditures.
- Q3 2018 earnings included an $80 U.S. tax-reform charge; nine-month 2018 results also included a $15 foreign-tax benefit. These items affect reported year-over-year comparisons. The effective tax rate was 21.0% for Q3 2019 and 24.1% for the first nine months.
- Hill’s expanded a voluntary recall of certain canned dog food because of potentially elevated Vitamin D from a supplier error. Related sales and costs had no material impact through September 30, and the company did not expect a material future impact; Hill’s is entitled to supplier indemnification. Related lawsuits are pending.
Outlook, risks and contingencies
Management expected challenging macroeconomic and market conditions and category growth below historical levels; the filing provides no specific company-wide sales or EPS guidance. It forecast 2019 capital expenditures at approximately 2.2%–2.5% of sales and stated that operating cash flow and debt issuance should meet foreseeable operating and recurring cash needs.
Management cited intense competition, retailer inventory actions and shelf-access constraints, e-commerce and alternative-channel disruption, currency volatility, high raw and packaging material costs, and uncertainty in achieving restructuring savings. The company reported reasonably possible legal losses of $0–approximately $200 in excess of accrued amounts for matters where losses could be estimated, while noting actual outcomes could differ. Brazilian tax proceedings include assessments of approximately $145 and $61; management said it believes the claims are without merit. There were 242 pending U.S. talc-related cases at quarter-end. Management did not believe the disclosed contingencies would materially affect consolidated financial position or ongoing results, but acknowledged an adverse outcome could be material to a particular period.
Important facts for investors to verify
- Filorga’s final purchase-price allocation, integration progress and contribution to growth, margins and debt service.
- Commercial paper, total debt, refinancing capacity and the pace of planned share repurchases.
- Whether the restructuring program delivers forecast savings, and the timing and cash cost of remaining charges.
- Underlying margin and earnings trends after separating foreign exchange, restructuring, acquisition costs and prior-year tax items.
- Developments in Brazilian tax, talc, ERISA, competition and Hill’s recall-related proceedings, including any changes in estimated exposure.