Colgate-Palmolive Company — FY 2016 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2016; quarterly data includes the fourth quarter. Colgate sells consumer and pet nutrition products in more than 200 countries. Oral, Personal and Home Care generated 85% of 2016 sales and Hill’s Pet Nutrition 15%. Approximately 75% of sales came from outside the U.S. and approximately 50% from emerging markets.
Key financial results
Amounts in U.S. dollars; millions except per-share data and percentages.
| Metric | 2016 | 2015 | Change / context |
|---|---|---|---|
| Net sales | $15,195 | $16,034 | Down 5.0%; organic sales increased 4.0% |
| Gross profit / GAAP margin | $9,123 / 60.0% | $9,399 / 58.6% | Adjusted margin was 60.3%, up 160 basis points |
| Operating profit / GAAP margin | $3,837 / 25.3% | $2,789 / 17.4% | Adjusted operating profit was $3,985 vs. $3,988; adjusted margin 26.2% vs. 24.9% |
| Net income attributable to Colgate | $2,441 | $1,384 | Reported increase substantially reflects the 2015 Venezuela accounting charge |
| Diluted EPS | $2.72 | $1.52 | Adjusted EPS was $2.81 in both years |
| Cash from operations | $3,141 | $2,949 | Up from 2015 |
| Capital expenditures | $593 | $691 | Down; 2017 expected at about 4.0% of sales |
| Total debt / cash and equivalents | $6,533 / $1,315 | $6,548 / $970 | Debt broadly stable; cash increased |
| Current ratio | 1.3 | 1.2 | Working capital, as defined by the company, was negative 2.2% of sales vs. positive 0.5% |
Net cash used in investing activities was $499 million and net cash used in financing activities was $2,233 million. Dividends paid were $1,508 million ($1.55 per share); share repurchases totaled $1,335 million. Shareholders’ equity attributable to Colgate was negative $243 million, while total equity was $17 million.
Fourth quarter: Sales were $3,721 million versus $3,899 million in Q4 2015. Net income attributable to Colgate was $606 million versus a loss of $458 million, and diluted EPS was $0.68 versus a loss of $0.51. The year-over-year comparison includes the large Venezuela deconsolidation charge recorded in Q4 2015.
Material changes and unusual items
- Sales fell in reported dollars, mainly reflecting negative foreign exchange and the exclusion of Venezuela and divested operations; organic sales rose 4.0%, with volume up 1.5% excluding those impacts and pricing up 2.5%.
- Hill’s Pet Nutrition sales increased 2.5% to $2,264 million, while Oral, Personal and Home Care sales declined 6.5% to $12,931 million. Latin America’s reported sales fell 15.5%, affected by Venezuela’s deconsolidation and currency; organic sales in the region grew 10.0%.
- Reported 2016 results included $228 million of pretax restructuring charges, a $97 million pretax gain on the Mexico land sale, $17 million of previously disclosed litigation charges, and tax benefits from previously disclosed matters. The 2016 effective tax rate was 30.8%; the company’s adjusted rate was 31.3%.
- In 2015, Colgate recorded a $1,084 million pretax charge ($1,058 million after tax) upon deconsolidating its Venezuelan subsidiary. From 2016, Venezuela’s local operating results were no longer consolidated; related cash receipts were immaterial.
- Adjusted gross margin improved through cost savings, pricing and restructuring benefits, partly offset by higher costs, including foreign-exchange-related material costs. Adjusted operating profit was essentially flat year over year.
Outlook, risks and contingencies
- Management expects challenging global economic conditions, slow category growth, intense competition, currency volatility and high raw-material costs to continue. It provided no specific numerical 2017 sales, profit or EPS guidance in the filing.
- The 2012 Restructuring Program is expected to run through December 31, 2017. Management estimated 2017 pretax charges of $180–$360 million and 2017 pretax savings of $40–$60 million; fully implemented annual pretax savings are projected at $430–$495 million. These are estimates and depend on execution.
- Management said operating cash flow and debt issuance should meet foreseeable operating and recurring cash needs. The company had $2,927 million of unused domestic and foreign credit lines and was in compliance with debt covenants.
- Key exposures include foreign exchange, commodity and interest-rate movements; retailer bargaining power and channel shifts; product innovation and brand reputation; supply-chain and cyber disruption; regulation of ingredients (including triclosan-related matters); and execution of restructuring and cost-saving initiatives.
- For disclosed matters, reasonably possible losses above accrued liabilities were estimated at $0–$225 million. This estimate excludes 115 pending U.S. talcum-powder cases, for which losses could not be reasonably estimated. Brazilian tax assessments include approximately $143 million and a separate approximately $59 million assessment; the company is contesting them. Management cautions that outcomes and ultimate losses may differ materially from estimates.
Important facts for investors to verify
- Reconcile reported sales and profit trends with organic growth and the effects of foreign exchange, Venezuela’s deconsolidation, divestitures and non-GAAP adjustments.
- Assess whether restructuring savings, expected charges and the 2017 completion timetable are achieved.
- Monitor sales volume, pricing and market share: global toothpaste and manual toothbrush shares each declined 0.3 percentage points in 2016.
- Review liquidity and capital allocation, including debt maturities, foreign-held cash, dividends and repurchases; approximately $3.4 billion of foreign earnings remained designated indefinitely reinvested at year-end.
- Track developments in Brazilian tax disputes, competition matters, talcum-powder litigation and ingredient regulation, noting the company’s stated uncertainty around outcomes.