Business context and reporting period
Colgate-Palmolive Company’s unaudited Form 10-Q covers the three months ended March 31, 2013, compared with the same period in 2012. The company sells Oral, Personal and Home Care products and Hill’s Pet Nutrition products in more than 200 countries and territories; approximately 80% of sales are generated outside the United States.
Financial performance
All dollar amounts are in millions except per-share data.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $4,315 | $4,200 | +2.5% |
| Gross profit / margin | $2,515 / 58.3% | $2,437 / 58.0% | Gross profit +3% |
| Operating profit / margin | $742 / 17.2% | $938 / 22.3% | −21% |
| Net income attributable to Colgate | $460 | $593 | −22% |
| Diluted EPS | $0.97 | $1.23 | −21% |
| Net cash from operations | $777 | $662 | +17% |
| Capital expenditures | $94 | $60 | Increased |
Sales growth comprised volume growth of 4.0% and net selling price increases of 1.5%, offset by a 3.0% foreign-exchange headwind. Organic sales growth, a non-GAAP measure, was 6.0%. Adjusted for specified unusual items, management reported operating profit of $985 versus $950 (+4%), diluted EPS of $1.32 versus $1.24 (+6%), and gross margin of 58.6% versus 58.2%. These non-GAAP measures are supplemental, not substitutes for GAAP results.
Segments
- Oral, Personal and Home Care sales rose 3.5% to $3,781; organic sales increased 6.5%.
- North America sales increased 5.5% to $764 and operating profit increased 22% to $215.
- Latin America sales increased 1.0% to $1,214, with 9.0% organic growth; operating profit fell 11% to $312, reflecting Venezuela-related costs and inflation.
- Europe/South Pacific sales decreased 0.5% to $848; operating profit rose 9% to $200.
- Greater Asia/Africa sales increased 8.5% to $955; operating profit rose 13% to $248.
- Hill’s Pet Nutrition sales decreased 1.5% to $534, while organic sales grew 0.5%; operating profit fell 8% to $136.
Liquidity, debt and capital
Cash and cash equivalents were $932 at March 31, 2013, versus $884 at year-end 2012. Current assets were $4,828 and current liabilities $4,091. Total debt was $5,357, up from $5,230 at December 31, 2012; long-term debt including current maturities was $5,345. Cash flow from operations was $777; investing activities used $232 and financing activities used $462. Financing included $290 of dividends paid, $385 of treasury-share purchases, $1,553 of debt issuance and $1,436 of principal repayments. The company said operating cash flow and debt issuance should cover foreseeable operating and recurring cash needs. It reported compliance with borrowing covenants.
Material changes, outlook and risks
- Venezuela devaluation: Following the February 9, 2013 official-rate change from 4.30 to 6.30 bolivars per U.S. dollar, the company recorded a one-time pretax charge of $172, or $111 after tax ($0.23 diluted EPS). Venezuela represented about 4% of sales. Management cited continued risks from currency and payment controls, price controls, inflation, import restrictions and labor issues; further devaluation could affect approximately $400 of local-currency net monetary assets.
- Restructuring: The four-year program, expected to be substantially complete by December 31, 2016, incurred $66 pretax ($52 after tax) in Q1 2013 and $155 pretax cumulatively through March 31. Total projected charges are $1,100–$1,250 pretax; approximately 75% are expected to be cash expenditures. Management estimated 2013 charges of $260–$310 pretax and annual savings by year four of $365–$435 pretax, with 2013 savings of $40–$50, mostly in the second half. The program is expected to reduce the workforce by approximately 6% from the 2012 level.
- Other outlook: Management expected challenging global economic and market conditions, heightened competition, volatile currencies and high commodity costs. Capital expenditures for 2013 were projected at approximately 4.5% of sales. The estimated full-year effective tax rate before discrete items was 32.0%. The annualized common dividend was increased 10% to $2.72 per share, effective in Q2 2013.
- Legal contingencies: The company estimated reasonably possible losses in excess of accruals of $0–$225. Matters include Brazilian tax disputes, European competition investigations and an ERISA class-action case. Management did not expect their ultimate resolution to materially affect consolidated financial position or ongoing results, but noted an adverse outcome could materially affect a particular quarter or year. A German competition investigation concluded in March 2013 with no penalty.
- Other: A two-for-one stock split was approved, with shares scheduled for distribution May 15, 2013. Reported Q1 share and per-share figures are pre-split; pro forma diluted EPS was $0.48 for 2013 and $0.61 for 2012. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of future earnings and cash flow is affected by Venezuela’s currency, pricing and import controls, and whether further devaluation occurs.
- Whether the restructuring charges, timing and projected savings remain on plan, and how much of the savings translate into cash flow.
- Whether organic sales growth is sustained and whether Pet Nutrition’s volume and profit trends recover.
- Debt, refinancing needs, cash availability abroad, and the practical effect of Venezuelan currency restrictions on repatriation.
- Developments in the Brazilian, European competition and ERISA matters, including losses beyond recorded accruals.
- Reconcile GAAP results with management’s non-GAAP adjustments when assessing underlying performance.