Colgate-Palmolive Company — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Unless stated otherwise, amounts are in millions of U.S. dollars. The filing is unaudited.
Business context and results
Colgate operates in Oral, Personal and Home Care and Pet Nutrition, selling in more than 200 countries and territories. About 80% of sales came from outside the U.S. and more than 50% from emerging markets.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $4,352 | $4,346 | $8,677 | $8,661 |
| Operating profit | $980 | $906 | $1,614 | $1,648 |
| Net income attributable to Colgate | $622 | $561 | $1,010 | $1,021 |
| Diluted EPS | $0.67 | $0.60 | $1.09 | $1.08 |
| Gross margin | 58.6% | 58.3% | 58.5% | 58.3% |
| Operating margin | 22.5% | 20.8% | 18.6% | 19.0% |
Q2 reported sales were nearly flat, while organic sales rose 4.0%, reflecting volume growth of 2.5% and higher net selling prices of 1.5%, offset by a 4.0% foreign-exchange impact. For the first half, organic sales grew 5.5%, with volume up 4.0% and pricing up 1.5%, offset by a 5.5% currency impact. Excluding specified unusual charges, Q2 operating profit rose 2% to $1,056 and diluted EPS increased 4% to $0.73; first-half adjusted operating profit rose 2% to $2,059 and adjusted diluted EPS rose 4% to $1.41. These are company-presented non-GAAP measures.
Cash flow, debt and liquidity
- First-half operating cash flow was $1,389, versus $1,325 a year earlier. Capital expenditures were $314, up from $243; investing activities used $314.
- Financing activities used $830, including $662 in dividends and $746 in treasury-share purchases. Cash increased $199 to $1,161 from year-end 2013.
- Total debt was $6,061 at June 30, 2014, versus $5,657 at December 31, 2013; long-term debt, including current maturities, was $6,041. No commercial paper was outstanding at quarter-end. The company issued $1 billion of notes in Q1: $500 million of five-year notes at 1.75% and $500 million of ten-year notes at 3.25%.
- Management said operating cash flow and debt issuance should cover foreseeable operating and recurring cash requirements, including debt service, dividends, capital spending, restructuring and repurchases. It expected 2014 capital expenditures of approximately 4.5% of sales.
Material changes and management commentary
- Regional and product performance: Q2 organic sales increased 8.0% in Latin America, 6.5% in Africa/Eurasia, 3.0% in Asia, 2.5% in Europe/South Pacific and 1.5% in North America. Latin America operating profit fell 12%, with currency and input costs pressuring results. Hill’s Pet Nutrition sales rose 2% in Q2, mainly on pricing; volume declined 1.5%.
- Margins and costs: Q2 gross margin improved year over year; management cited pricing and cost savings, partly offset by higher raw and packaging costs. First-half reported operating profit declined 2%, but included a larger Venezuela remeasurement charge in 2014; excluding identified items, it rose 2%. Advertising spending declined 5.8% in Q2 and 2.3% for the first half.
- Venezuela: The 2014 exchange-rate regime change led to a $266 pretax remeasurement charge in Q1 ($174 after tax, or $0.19 per diluted share). The company estimated ongoing effects of about $0.03 per diluted share per quarter during 2014, subject to exchange-rate changes. Venezuela represented about 3% of first-half sales. Currency access, price controls, inflation and labor issues remain risks; approximately $505 of local-currency-denominated net monetary assets were exposed to further remeasurement.
- Restructuring: The four-year program is expected to be substantially completed by December 2016. Cumulative charges are estimated at $1.1–$1.25 billion pretax; $636 had been incurred through June 30. The company forecast 2014 charges of $275–$325 million pretax and annual savings of $365–$435 million pretax by the program’s fourth year. About 75% of charges are expected to require cash expenditures.
- Outlook and risks: Management expected challenging macroeconomic and market conditions, heightened competition, currency volatility and high commodity costs. It cited brands, innovation, cost initiatives and restructuring as support for long-term performance. The filing does not provide a specific consolidated sales or EPS forecast.
Contingencies and unusual items
- In July 2014, the company received an adverse foreign-court tax decision. It expects to record a $68 million tax charge in Q3 2014, comprising a $31 million increase in unrecognized tax benefits and a $37 million deferred-tax-asset write-off.
- Management estimated reasonably possible legal losses above accruals at $0 to approximately $250 million for disclosed matters, but excluded certain competition and talc cases for which potential losses could not be estimated. The company stated that an adverse outcome could materially affect a particular quarter or year.
- Brazilian tax assessments include approximately $125 million and $80 million, both contested. European competition proceedings and fines, Australian competition proceedings, and 16 pending talc-product cases were also disclosed. A roughly $40 million ERISA settlement received final court approval in July, subject to the appeals period.
- Other first-half items include $176 million pretax of restructuring charges and the $266 million Venezuela charge. A French competition charge of $18 million was included in the first half of 2013, not 2014.
Important facts for investors to verify
- Underlying organic sales, pricing and volume trends versus the sizable foreign-exchange headwind, especially in Latin America.
- Progress and realized savings from the restructuring program compared with its remaining charges and cash requirements.
- Venezuela exchange rates, access to U.S. dollars, price controls and exposure to further asset remeasurement or impairment.
- Debt levels, borrowing costs, capital spending, repurchases and the extent to which cash held abroad is available for domestic needs.
- Timing and ultimate impact of the expected Q3 tax charge and the outcomes of legal and regulatory matters.