Colgate-Palmolive Company — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Although the request references 2013 Q4, this filing reports the full fiscal year; fourth-quarter figures are noted separately where available. Unless stated otherwise, amounts are in millions of U.S. dollars.
Business context
Colgate-Palmolive sells consumer products in more than 200 countries and territories through two segments: Oral, Personal and Home Care, and Hill’s Pet Nutrition. Approximately 80% of sales came from outside the United States and more than half came from emerging markets. Oral Care represented 46% of 2013 sales, Personal Care 21%, Home Care 20% and Pet Nutrition 13%.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $17,420 | $17,085 | +2%; organic sales +6% |
| Gross profit / margin | $10,201 / 58.6% | $9,932 / 58.1% | Profit +3%; margin +50 bps |
| Operating profit / margin | $3,556 / 20.4% | $3,889 / 22.8% | Profit −9% |
| Net income attributable to Colgate | $2,241 | $2,472 | −9% |
| Diluted EPS | $2.38 | $2.57 | −7% |
| Cash from operations | $3,204 | $3,196 | Nearly unchanged |
| Capital expenditures | $670 | $565 | Higher investment |
Reported earnings included substantial unusual charges. Excluding the items identified by management, non-GAAP operating profit was $4,140, up 3%; non-GAAP operating margin was 23.8%, up 30 bps; non-GAAP net income was $2,665, up 4%; and diluted EPS was $2.84, up 6%. These company-defined non-GAAP measures are supplemental, not substitutes for GAAP results.
Fourth quarter: Sales were $4,361 versus $4,286 in Q4 2012. Net income attributable to Colgate was $564 versus $598, and diluted EPS was $0.60 versus $0.63. Q4 2013 results included $125 of after-tax restructuring charges, a $5 French competition-law charge and $3 of Mexico land-sale costs.
Segments: Oral, Personal and Home Care sales rose 2% to $15,209, with 6% organic growth. Hill’s sales rose 2.5% to $2,211, with 5% organic growth, but operating profit fell 4% to $563 and its operating margin declined 180 bps to 25.5%. Asia delivered 9% sales growth and 13% operating-profit growth. Latin America sales declined 0.5% amid 9.5% negative foreign exchange; operating profit fell 5%. Europe/South Pacific sales declined 0.5%, while operating profit rose 8%.
Cash, debt and liquidity: Cash and cash equivalents were $962 at year-end, compared with $884 a year earlier; $865 was held by foreign subsidiaries. Current assets were $4,822 and current liabilities $4,470 (current ratio approximately 1.1). Total debt was approximately $5,657, including $895 of current maturities; long-term debt including current maturities was $5,644. Unused domestic and foreign credit lines totaled $2,444, and commercial paper outstanding was zero. Operating cash flow was broadly stable; financing activities used $2,142, including $1,382 in dividends and $1,521 in share repurchases. The dividend was $1.33 per share, up from $1.22.
Material changes versus prior year
- Organic sales growth remained 6%, but reported sales growth was limited to 2% by a 4% adverse foreign-exchange effect.
- GAAP operating profit, net income and diluted EPS declined, principally reflecting higher restructuring charges and the Venezuela devaluation charge; adjusted measures increased.
- Gross margin expanded 50 bps on a comparable, company-defined non-GAAP basis, as funding-the-growth savings and pricing more than offset higher materials costs. Advertising spending increased 5.5% to $1,891.
- Operating cash flow was nearly flat while capital spending rose to $670. Total debt increased to $5,657 from $5,230.
- The company separately reported Asia and Africa/Eurasia from 2013; prior segment data was recast, with no effect on consolidated results. A two-for-one stock split was completed in May 2013, and historical per-share figures were restated.
Outlook, risks and contingencies
Management said global macroeconomic and market conditions were expected to remain challenging, citing competition, currency volatility and high commodity costs. The filing does not provide a specific company-wide 2014 sales or EPS forecast. For the four-year restructuring program, management estimated cumulative pretax charges of $1,100–$1,250 through 2016, with annual pretax savings of $365–$435 by year four. For 2014, expected pretax charges were $275–$325 and savings $105–$125. Capital expenditures were expected to remain around 4.5% of sales in 2014.
Venezuela: The 2013 bolivar devaluation caused a $172 pretax ($111 after-tax) charge. Following Venezuelan government announcements in January 2014, Colgate expected to remeasure most Venezuelan net monetary assets at the SICAD rate; at the then-recent 11.70 rate, it estimated a further one-time after-tax loss of approximately $180–$200, or $0.19–$0.21 per diluted share, in Q1 2014. Estimated ongoing 2014 effects were $0.11–$0.14 per diluted share, subject to significant uncertainty. Import, currency, payment, price and profit controls, inflation and labor issues remain risks. Venezuela represented about 4% of 2013 sales; approximately $600 of local-currency net monetary assets were exposed to potential remeasurement.
Legal and other exposures: Management estimated reasonably possible losses above recorded accruals of $0–$250 in aggregate for disclosed matters, excluding Australian competition proceedings and talc cases for which potential losses could not be estimated. Matters include Brazilian tax assessments of approximately $120 and $75; competition investigations and fines in Europe and Australia; 14 pending talc-related cases alleging asbestos contamination of pre-1996 products; and an ERISA class-action settlement expected to require approximately $40 from the Plan, subject to final court approval. Management did not expect the disclosed matters to materially affect consolidated financial position or ongoing results, while acknowledging an adverse outcome could materially affect a particular period.
Other risks include foreign exchange, retailer concentration and bargaining power, commodity and supplier disruptions, product liability and regulatory changes, innovation execution, restructuring benefits, cybersecurity and international political and economic conditions. Management reported effective disclosure controls and internal control over financial reporting; the auditor issued an unqualified opinion.
Important facts for investors to verify
- Whether the expected SICAD remeasurement and continuing Venezuelan currency, pricing and import restrictions produced the estimated 2014 impacts.
- Whether restructuring charges, implementation timing and projected savings remain within the disclosed ranges, and whether savings translate into cash flow.
- Whether organic growth and margin improvement persist after separating currency effects and company-defined adjustments from GAAP results.
- Developments in competition investigations, Brazilian tax cases, talc litigation and court approval of the ERISA settlement, including potential losses not included in the disclosed estimate.
- Debt maturities, foreign-held cash and the company’s capacity to fund dividends, repurchases, capital expenditures and restructuring costs while maintaining liquidity.