Colgate-Palmolive Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unless otherwise stated, amounts are in millions of dollars. The filing is unaudited.
Business context and results
Colgate sells oral, personal and home care products and Hill’s pet nutrition products in more than 200 countries and territories. About 80% of sales are outside the U.S.; more than half are from emerging markets.
- Q3 sales: $4,398, up 1.5% year over year. Organic sales growth was 6.0%, with volume up 5.0%, pricing up 1.0% and foreign exchange reducing growth by 4.5%.
- Q3 earnings: Operating profit was $1,016, down 1%; operating margin was 23.1% versus 23.7%. Net income attributable to Colgate was $656 versus $654; diluted EPS was $0.70 versus $0.68.
- Q3 gross margin: 58.8% versus 58.4%. Excluding specified restructuring and Mexico land-sale costs, management reported gross margin of 59.0% versus 58.6% and operating margin of 23.9% in both periods.
- Nine-month sales and earnings: Sales were $13,059, up 2.0%; organic growth was 5.5%. Operating profit was $2,664 versus $2,947, and attributable net income was $1,677 versus $1,874. Diluted EPS was $1.78 versus $1.95. Management’s adjusted, non-GAAP figures were operating profit of $3,066 versus $2,988 and diluted EPS of $2.09 versus $1.98.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $2,365, up from $2,133. Capital expenditures were $419, compared with $317; investing activities used $628.
- Cash and cash equivalents were $721 at September 30, down from $884 at year-end 2012. Current assets were $4,600 and current liabilities $4,491.
- Total debt was $5,284, versus $5,230 at year-end; long-term debt, including current maturities, was $5,265. The company reported no commercial paper outstanding at quarter-end and said it was in compliance with debt covenants.
- Financing activities used $1,810, including $1,030 of dividends paid and $1,115 of treasury-share purchases. Quarterly dividends declared were $0.34 per share; a two-for-one stock split took effect in May 2013, and per-share data is presented post-split.
Material changes and unusual items
- Q3 sales growth was led by volume and organic growth, while currency effects—particularly in Latin America—reduced reported growth. Asia’s Q3 sales rose 7.5%; Latin America sales fell 2.0% despite 9.5% organic growth, primarily because of foreign exchange.
- Q3 Hill’s Pet Nutrition sales increased 3%, but operating profit declined 6%, with margin falling to 25.3% from 27.8%, mainly reflecting higher raw and packaging costs.
- Nine-month results included a $172 pretax ($111 aftertax) Venezuela devaluation charge, $198 of pretax restructuring-program charges, an $18 French competition-law charge and $14 of Mexico land-sale costs. The Venezuela charge reduced nine-month diluted EPS by $0.12.
- The effective tax rate was 31.2% for Q3 and 32.3% for nine months. Management estimated a full-year rate of 31.7% before discrete items.
Outlook, risks and contingencies
- The filing provides no specific company-wide sales or EPS forecast. Management described global macroeconomic and market conditions as highly challenging, citing competition, currency volatility and high commodity costs.
- The four-year restructuring program is expected to be substantially completed by December 31, 2016. Estimated total pretax charges remain $1.1–$1.25 billion; 2013 charges were projected at $365–$390 million, with annual pretax savings of $365–$435 million by year four. Management projected 2013 savings of $45–$55 million and an approximately 6% workforce reduction from the 2012 level by the program’s end.
- Venezuela faces currency, import and price controls, high inflation and labor risks. The subsidiary represented about 4% of company sales for the nine-month period; its local-currency net monetary asset position subject to potential remeasurement was approximately $530 million at quarter-end.
- For disclosed matters, the company estimated reasonably possible losses in excess of accrued liabilities of $0–approximately $250 million. Management said ultimate outcomes could differ and that an adverse result could materially affect a particular quarter or year. An ERISA class-action settlement of approximately $40 million was subject to court approval; several competition-law matters and Brazilian tax disputes remained pending.
- Management said operating cash flow and debt issuances should cover foreseeable operating and recurring cash needs, including debt service, dividends, capital expenditures, restructuring costs and repurchases. Capital expenditures for 2013 were expected to be about 4.5% of sales.
Most important facts for investors to verify
- Whether organic growth and volume gains persist after accounting for foreign-exchange effects and competitive conditions.
- Progress, cash costs and realized savings from the restructuring program against management’s estimates.
- Further developments in Venezuela, including currency access, controls, potential devaluation and exposure of the net monetary asset position.
- Debt, cash availability and the timing and outcome of material legal and tax proceedings, including the ERISA settlement and European and Brazilian matters.
- The basis and comparability of management’s non-GAAP adjustments when assessing underlying margins, earnings and growth.