Colgate-Palmolive Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Amounts are in millions of U.S. dollars except per-share data. The company sells Oral, Personal and Home Care products and Pet Nutrition products; approximately 80% of sales are outside the United States.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $4,066 | $4,352 | $8,136 | $8,677 |
| Operating profit | $932 | $980 | $1,792 | $1,614 |
| Operating margin | 22.9% | 22.5% | 22.0% | 18.6% |
| Net income attributable to Colgate | $574 | $622 | $1,116 | $1,010 |
| Diluted EPS | $0.63 | $0.67 | $1.22 | $1.09 |
| Gross margin | 58.2% | 58.6% | 58.5% | 58.5% |
- Q2 sales fell 6.5%, despite 3.0% volume growth and 2.5% higher net selling prices, as foreign exchange reduced reported sales by 12.0%. Organic sales grew 5.5%. For the first half, sales fell 6.0%, with organic sales growth of 4.5% and an 11.0% foreign-exchange headwind.
- Q2 GAAP operating profit declined 5%; excluding disclosed restructuring, Venezuela remeasurement and Mexico land-sale items, operating profit declined 5% to $1,000 and margin increased 30 basis points to 24.6%. Q2 adjusted net income was $639 versus $676, and adjusted diluted EPS was $0.70 versus $0.73.
- First-half GAAP operating profit rose 11%, principally because the prior-year period included a $266 Venezuela remeasurement charge. Excluding specified items, operating profit declined 5% to $1,960; adjusted net income declined 5% to $1,248 and adjusted diluted EPS declined 4% to $1.36.
- Cost savings and pricing were offset by higher raw and packaging costs, including foreign-exchange transaction costs. Q2 adjusted gross margin fell 50 basis points; first-half adjusted gross margin fell 10 basis points. Advertising expense declined 12.4% in Q2 and 11.2% in the first half.
Cash flow, debt and liquidity
- First-half operating cash flow was $1,223, down from $1,389. Capital expenditures were $280; investing activities used $438; financing activities used $756. Cash declined $30 to $1,059.
- At June 30, cash was $1,059; current assets were $4,988 and current liabilities $4,206. Total debt was $6,683, including $488 current and $6,186 long-term debt. Total liabilities were $12,903 and shareholders’ equity $757.
- Management said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs. The company issued €500 million of four-year variable-rate notes in Q2. It reported compliance with borrowing covenants. Cash dividends paid in the first half were $689 and treasury-share purchases were $767.
- 2015 capital expenditures were expected to remain about 4.5% of sales. Management reported working capital, using its stated definition, at negative 0.2% of sales for the first half versus positive 0.7% in the comparable period.
Material changes, outlook and risks
- Regional results: Q2 organic sales grew across all reported regions and Pet Nutrition: 2.5% North America, 9.0% Latin America, 2.0% Europe/South Pacific, 5.0% Asia, 4.0% Africa/Eurasia and 7.0% Pet Nutrition. Reported sales fell sharply in several regions because of currency depreciation; Europe/South Pacific and Africa/Eurasia reported sales declined 16.5% and 17.5%, respectively.
- Restructuring: The 2012 program had incurred $898 of cumulative pretax charges by June 30. Total program charges were estimated at $1,285–$1,435 pretax, with completion substantially expected by year-end 2016. 2015 charges were estimated at $330–$385 pretax; annual savings by the program’s fourth year were projected at $405–$475 pretax. Approximately 2,000–2,500 net positions were expected to be eliminated by the end of 2016. These are management estimates, not guaranteed outcomes.
- Venezuela: The Q2 devaluation and remeasurement produced a $16 pretax charge ($10 after tax, or $0.01 per diluted share). Venezuela represented about 4% of first-half sales. The company disclosed a $602 local-currency net monetary asset position subject to remeasurement and estimated that using the SIMADI rate at June 30 would have caused an approximately $528 pretax ($336 after-tax) loss. Import-dollar availability, price controls, inflation and possible further currency changes create significant operating and impairment risks.
- Other unusual items: A $15 tax charge followed foreign court rulings disallowing deductions, increasing unrecognized tax benefits. The company expects the full-year effective tax rate before discrete items to be about 31.5%. A previously agreed sale of a Mexico City property was considered likely to close in the first half of 2016, although the buyer could terminate if conditions are not met. A detergent-business sale to Henkel for approximately A$310 (about $230 at the stated exchange rate) was expected to close in Q3 2015, subject to customary conditions.
- Contingencies and broader risks: The company estimated reasonably possible losses above accrued liabilities of $0–approximately $200, excluding certain Australian competition and additional talc cases for which losses could not be estimated. Management did not expect currently discussed matters to materially affect consolidated financial position or ongoing results, but acknowledged an adverse outcome could materially affect a particular period. The filing also cites competition, currency, input-cost, political, regulatory and consumer-spending risks. No specific earnings or sales guidance was provided.
Most important facts for investors to verify
- Whether organic growth continues to translate into reported growth as currency headwinds ease, and whether raw-material and foreign-exchange transaction costs moderate.
- Actual restructuring charges, cash payments and realized savings versus the company’s stated estimates.
- Venezuela’s access to foreign currency, the applicable remeasurement rate, and any effect on earnings, assets or consolidation status.
- Progress and final terms of the Mexico property and Henkel divestiture transactions.
- Developments in Brazilian tax, competition-law and talc litigation, including matters excluded from the disclosed estimated loss range.